Former Soviet Union: Creditworthiness of Successor States and U.S. Export
Credit Guarantees (Chapter Report, 02/24/95, GAO/GGD-95-60).

Burdened with debt and plagued by economic and political uncertainties,
the successor states of the former Soviet Union are not creditworthy and
are at high risk for default on billions of dollars in U.S. agricultural
export credit guarantees. Arrears on the debt of the former Soviet Union
have continued to mount since 1989--notwithstanding debt deferral, debt
rescheduling, and other foreign assistance provided by creditor nations.
Although Western nations have indicated a willingness to provide more
debt relief and other assistance, much of this aid depends on Russia's
implementing difficult macroeconomic and structural reforms.  Whether,
and when, Russia can or will implement such reforms is questionable.
During the period when the Agriculture Department (USDA) provided more
than $5 billion in export credit guarantees to the former Soviet Union,
Russia, and Ukraine, USDA's own evaluations found that these states were
very risky in terms of their ability to repay such debt.  As a result of
the large amount of credit guarantees made to the former Soviet Union
and its successors and their poor creditworthiness, the export credit
guarantee program is heavily exposed to default.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-95-60
     TITLE:  Former Soviet Union: Creditworthiness of Successor States 
             and U.S. Export Credit Guarantees
      DATE:  02/24/95
   SUBJECT:  Federal aid to foreign countries
             Exporting
             Agricultural products
             International economic relations
             International trade
             Government guaranteed loans
             Economic analysis
             Loan defaults
             Foreign economic development credit
             Agricultural programs
IDENTIFIER:  USDA GSM-102 Program
             USDA GSM-103 Program
             CCC Export Credit Guarantee Program
             CCC Intermediate Export Credit Guarantee Program
             Soviet Union
             Russia
             Armenia
             Azerbaijan
             Belarus
             Estonia
             Georgia (Formerly Soviet Union)
             Kazakhstan
             Kyrgyzstan
             Latvia
             Lithuania
             Moldova
             Tajikistan
             Turkmenistan
             Ukraine
             Uzbekistan
             Iraq
             USDA Export Enhancement Program
             USDA Food for Progress Program
             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Committee on Agriculture,
Nutrition, and Forestry, U.S.  Senate

February 1995

FORMER SOVIET UNION -
CREDITWORTHINESS OF SUCCESSOR
STATES AND U.S.  EXPORT CREDIT
GUARANTEES

GAO/GGD-95-60

Former Soviet Union

(483637)


Abbreviations
=============================================================== ABBREV

  ASCS - Agricultural Stabilization and Conservation Service
  CCC - Commodity Credit Corporation
  CCCD - Commodity Credit Corporation Operations Division
  CIA - Central Intelligence Agency
  CIS - Commonwealth of Independent States
  C&MP - Commodity and Marketing Programs Division
  EEP - Export Enhancement Program
  ERS - Economic Research Service
  FAS - Foreign Agricultural Service
  FSU - Former Soviet Union
  FY - Fiscal year
  G&FD - Grain and Feeds Division
  GDP - gross domestic product
  GNP - gross national product
  GSM - General Sales Manager
  G-7 - Group of Seven nations
  ICRG - International Country Risk Guide
  IMF - International Monetary Fund
  mbd - million barrels per day
  mmt - million metric tons
  NAC - National Advisory Council on International Monetary and
     Financial Policies
  NIS - Newly Independent States
  PDD - Program Development Division
  P.L.  - Public Law
  STF - Systemic Transformation Division
  TEID - Trade, Economics, and Information Division
  USDA - U.S.  Department of Agriculture
  USSR - Union of Soviet Socialist Republics
  VEB - Vnesheconombank
  WEFA - Wharton Econometrics Forecasting Associates

Letter
=============================================================== LETTER


B-253793

February 24, 1995

The Honorable Patrick Leahy
Ranking Minority Member
Committee on Agriculture,
 Nutrition, and Forestry
United States Senate

Dear Senator Leahy: 

This report responds to your request that we assess the
creditworthiness of the former Soviet Union and its successor states
in the context of the U.S.  Department of Agriculture's Office of the
General Sales Manager (GSM)-102 agricultural export credit guarantee
program. 

As you requested, unless you publicly announce its contents earlier,
we plan no further distribution of this report until 30 days after
its issue date.  At that time, we will send copies to the Secretaries
of Agriculture, State, and the Treasury and other interested
congressional committees.  Copies will also be made available to
other interested parties on request. 

Please contact me on (202) 512-4812 if you or your staff have any
questions concerning this report.  Other major contributors to this
report are listed in appendix IV. 

Sincerely yours,

Allan I.  Mendelowitz, Managing Director
International Trade, Finance,
 and Competitiveness


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

The U.S.  Department of Agriculture's (USDA) Office of the General
Sales Manager (GSM)-102 export credit guarantee program's mission is
intended to help maintain and further develop U.S.  agricultural
markets overseas.  However, the Food, Agriculture, Conservation, and
Trade Act of 1990 (P.L.  101-624), also known as the 1990 Farm Bill,
prohibits the issuance of export credit guarantees for agricultural
commodities to any country that the Secretary of Agriculture
determines cannot adequately service the debt associated with a
GSM-102 sale.  Since early 1991, USDA has provided more than $5
billion in GSM-102 export credit guarantees to the former Soviet
Union (FSU) and its successor states. 

The Ranking Minority Member of the Senate Committee on Agriculture,
Nutrition, and Forestry asked GAO to assess the creditworthiness of
the successor states in the context of the GSM-102 program.  GAO
analyzed their creditworthiness from a variety of perspectives,
including debt burden, external financing requirements, liquidity,
secondary market valuations of FSU debt, and country risk analyses. 
In addition, GAO (1) considered the general economic and political
environment in the FSU and its successor states; (2) reviewed how the
Soviet debt crisis developed and the relationship between debt
problems, on the one hand, and economic reform and creditworthiness
on the other; (3) examined how USDA assessments of creditworthiness
and market considerations affected USDA's decisions on providing the
FSU/successor states with credit guarantees; and (4) considered the
exposure of the GSM-102 portfolio to default by the FSU and its
successor states. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

"Creditworthiness" concerns a country's ability and willingness to
service its current and future foreign debt obligations.  The
debt-servicing requirement in the 1990 Farm Bill does not include a
general creditworthiness standard.  Rather, it requires that the
Secretary of Agriculture determine whether a prospective borrowing
country is capable of adequately servicing the debt associated with a
specific, proposed GSM-102 sale to that country before issuing a
credit guarantee.  However, there is a close relationship between a
country's general creditworthiness and its ability to service
particular debts. 

According to one estimate, at the end of 1993 Russian and FSU debt
combined totaled about $87 billion.  Of the 15 states that succeeded
the Soviet Union, Russia is the most important because it initially
accepted responsibility for 61 percent of the former Soviet debt and
more recently assumed responsibility for all FSU debt.  The other
states are Armenia, Azerbaijan, Belarus, Estonia, Georgia,
Kazakhstan, Kyrgystan, Latvia, Lithuania, Moldova, Tajikistan,
Turkmenistan, Ukraine, and Uzbekistan. 

Under the 1990 Farm Bill, the GSM-102 program is intended to develop,
expand, or maintain U.S.  agricultural markets overseas by
facilitating commercial export sales of U.S.  agricultural
commodities.  Under the program, USDA's Commodity Credit Corporation
(CCC) may guarantee loans with terms up to 3 years, enabling
countries that are short of U.S.  dollars to buy U.S.  agricultural
exports.  During 1991-93, USDA, through CCC, provided export credit
guarantees to the Soviet Union and two successor states at a time
when these states were experiencing hard currency shortages.  USDA
did so because the Soviet Union was considered a critical market for
U.S.  agricultural exports, according to USDA officials and
documents.  The Soviet Union received $3.74 billion in credit
guarantees.  After its dissolution, and through September 30, 1993,
Russia and Ukraine received credit guarantees equal to $1.06 billion
and $199 million, respectively. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Most, if not all, of the FSU successor states are not creditworthy,
and all should be considered at least high risk from a
creditworthiness perspective.  Most of the states have had severe
debt burden and severe liquidity problems.  Russia's already serious
debt burden has been compounded by its agreement with official
creditors to accept responsibility for all FSU debt.  Several
independent evaluations of the risk of engaging in financial
transactions with the successor states and the secondary market's
valuation of the FSU debt indicate that the successor states lack
creditworthiness. 

The states are also high-risk entities because of their difficult
economic and political situations.  Their economies are in disarray,
and political instability is a serious problem in several of the
states.  These conditions are not favorable for foreign investment,
which is considered essential if the states are to be capable of
meeting their financial needs. 

Arrears on FSU debt have continued to grow since
1989--notwithstanding debt deferral, debt rescheduling, and other
foreign assistance provided by creditor nations.  Additional debt
relief and foreign aid seem necessary if Russia is to succeed in
paying off the FSU debt.  Western creditor nations have indicated a
willingness to provide more debt relief and other assistance, but
much of this aid remains contingent on Russia's implementing
additional and difficult macroeconomic and structural adjustment
reforms.  Whether, and when, Russia can or will implement such
reforms are open questions. 

During the period when USDA provided more than $5 billion in export
credit guarantees to the FSU, Russia, and Ukraine, USDA's own
evaluations indicated that these states were very risky in terms of
their ability to repay GSM-proposed debt.  However, USDA did not
conclude that the states were incapable of adequately servicing the
debt associated with the proposed guarantees.  According to the
Assistant General Sales Manager, decisions on the credit guarantees
involved balancing creditworthiness considerations against market
development opportunities. 

As a result of the large amount of credit guarantees provided to the
FSU and its successors and their poor creditworthiness, the GSM-102
loan portfolio is heavily exposed to default.  Large defaults have
already occurred on FSU and Russian debt, requiring substantial
dollar outlays by the U.S.  government. 


   GAO'S ANALYSIS
---------------------------------------------------------- Chapter 0:4


      OVERALL CREDITWORTHINESS IS
      LOW
-------------------------------------------------------- Chapter 0:4.1

Since 1989, substantial arrears have accrued on the FSU debt--in
spite of debt relief, debt rescheduling, and other assistance
provided by creditor nations.  For example, arrears on official FSU
debt were $500 million at the end of 1989, $11.8 billion at the end
of 1992, and $8 billion through the first half of 1993.  GAO's
analysis of historical and forecast data indicates that all of the
successor states, as a group, were severely indebted in 1992 and
projected to remain so through 1997.  All except a few small states
had severe liquidity problems in 1992, and most successor states are
projected to experience severe liquidity problems through 1997. 

Russia's agreement, in April 1993, to accept responsibility for all
of the FSU's debt burden has reduced the debt burden of other
successor states but added to Russia's burden.  At the same time, a
number of the other states have been hurt by a reduction in transfers
previously received.  The latter include fiscal transfers from the
FSU's budget and subsidies associated with the underpricing of
Russia's energy and raw material exports.  Some states have fallen
into serious arrears with Russia and a few other successor states as
a result of trade deficits. 

Several organizations that assess the financial, economic, and/or
political risk involved in lending to various countries of the world
have rated Russia and the other successor states as very risky.  For
example, in March 1994 Euromoney ranked 11 of the 15 successor states
in the bottom quartile of all countries that it evaluated.  The
secondary market for trading bonds and loans of developing countries
has steeply discounted FSU debt.  According to data provided to GAO
by Chemical Bank, between July 1992 and March 1994, the price of FSU
loans in the secondary market averaged 26.8 cents on the dollar. 


      ECONOMIC AND POLITICAL
      ENVIRONMENT UNDERGOING
      DRAMATIC CHANGE
-------------------------------------------------------- Chapter 0:4.2

The area bounded by the FSU has experienced extraordinary change in
recent years.  The successor states are currently in varying stages
of transition to what many hope will be genuine democratic polities
and free market economies.  However, the latter outcomes are not
assured.  Economic decline in many of the successor states is
comparable to or greater than that experienced by the United States
during the Great Depression.  Economic and political reforms are
underway but have a long way to go.  Russia experienced a serious
constitutional crisis that culminated in a brief but violent attempt
to overthrow the Yeltsin government in late 1993.  Five other former
Soviet republics (Armenia, Azerbaijan, Georgia, Moldova, and
Tajikistan) have been convulsed by violent ethnic and civil strife
and intraregional conflict. 

Looking to the future, many analysts have suggested a wide spectrum
of possible outcomes for the FSU--ranging from successful
implementation of free market and democratic reforms to restoration
of an authoritarian and anti-Western Russian empire.  To the extent
that the political and economic situation appears subject to crisis
and/or widely divergent outcomes, foreign investment in the successor
states is likely to be adversely affected.  Total foreign investment
in Russia, according to a Commerce Department official, is not more
than $4 billion, a small amount relative to Russia's overall needs. 


      NEED FOR DEBT RELIEF AND
      ECONOMIC RESTRUCTURING
-------------------------------------------------------- Chapter 0:4.3

In 1992, the International Monetary Fund (IMF) estimated that in 1992
alone Russia might have an external financing requirement of $20
billion to $25 billion, and the other successor states would require
about $20 billion.  According to an estimate by the Wharton
Econometric Forecasting Associates Group (WEFA), the successor states
would require more than $20 billion in debt relief and other
financial assistance each year from 1993 through 1997. 

In spring 1992, western creditor nations indicated a willingness to
reschedule FSU debt and to provide Russia with substantial amounts of
other assistance--provided that Russia adopted a significant economic
reform program and demonstrated meaningful progress toward
stabilizing its economy.  However, during 1992 Russia fell
significantly short of its goals for restructuring its economy and
did not reach agreement with the IMF on an economic reform program
that would lead to a standby loan agreement.  (A standby agreement is
established when a borrowing country agrees to meet certain economic
performance criteria in return for receiving an IMF loan.)

In April 1993, representatives of the United States and 18 other
western creditor nations found it necessary to reschedule about $15
billion of FSU and Russian debt payments already in arrears or coming
due in 1993.  At the same time, the Group of Seven industrialized
nations agreed to provide substantial amounts of other types of
financial assistance.  However, much of the debt relief and foreign
assistance were again contingent on the Russian government's adopting
and implementing an ambitious and comprehensive macroeconomic and
structural adjustment program. 

During 1992 and 1993, creditor nations and international institutions
offered to provide $40 billion in financial assistance (not including
debt relief) to Russia, but only $23 billion was delivered. 
According to the IMF, much of the assistance was not forthcoming
because Russia had failed to stabilize its economy.  Most of the
actual assistance was in the form of export credits (i.e., $18
billion), and much of this amount was short-term trade credits that
had to be repaid in 1 to 3 years.  Over the medium term, short-term
trade credits (including USDA's GSM-102 export credit guarantees) can
aggravate rather than ease a country's debt-financing problems. 

In June 1994, creditor nation governments rescheduled another $7
billion of FSU debt and indicated that more comprehensive debt
rescheduling was still necessary.  As of October 1994, Russia had not
reached final agreement with its commercial creditors on rescheduling
$24 billion in debt that had been accumulating since late 1991.  And
Russia still had not achieved a standby agreement with the IMF.  Some
analysts have expressed concern that IMF-type economic reforms could
lead to prolonged and massive unemployment, thus increasing the risk
of possible political upheaval. 


      CREDIT AND MARKET
      DEVELOPMENT RISK
-------------------------------------------------------- Chapter 0:4.4

On several occasions between August 1990 and September 1992, USDA
offices with primary responsibility for assessing the risk of
proposed GSM credit guarantees recommended that guarantees not be
provided or be limited to much smaller amounts than were subsequently
made available to the FSU.  However, other program officials saw the
FSU and its successor states as a major market for U.S.  commodities
and were concerned that if guarantees were not made available, there
might be adverse impacts on U.S.  farm prices and on the cost of U.S. 
commodity support programs.  From a creditworthiness perspective,
they argued that the states had a good record in servicing U.S. 
agricultural debt and that FSU natural resources offered a good means
for earning foreign exchange over the longer run.  In addition, the
Assistant General Sales Manager said USDA believed that the FSU would
give preferential treatment to GSM-102 debt; otherwise, the FSU
risked losing continued access to GSM credit guarantees.  The manager
noted that food was a priority item, since without adequate food
supplies, political stability could be threatened. 

While the GSM statute prohibits USDA from extending credit guarantees
to any country the Secretary determines cannot service the debt, the
statute does not require that a country be considered generally
creditworthy in order to receive GSM credit guarantees.  Furthermore,
the statute does not provide any guidance as to what is an acceptable
level of risk in evaluating whether countries can adequately service
proposed GSM debt.  Consequently, countries that USDA program
officials assess as high risk can be approved for credit guarantees. 
Moreover, the statute does not place any limit on the amount of
guarantees that can be provided each year to high-risk countries in
aggregate or individually.  Consequently, USDA can provide large
amounts of guarantees to high-risk countries, making the GSM-102
portfolio subject to a potentially high rate of default. 

GSM-102 recipient countries vary significantly in terms of their risk
of defaulting on loans.  However, CCC does not adjust the fees that
it charges for GSM-102 credit guarantees to take into account the
riskiness of borrowers.  According to USDA officials, doing so might
reduce the competitiveness of GSM-102 exports.  In addition, the 1990
Farm Bill restricts CCC from charging a fee for any GSM-102 credit
guarantee in excess of 1 percent of the amount of the credit.  This
restriction was first enacted in 1985 in response to an
administration proposal to charge a 5-percent fee.  Some Members of
Congress were concerned that such a fee would adversely affect
GSM-102 exports.  However, if CCC fees included a risk-based
component, this could be used to help offset the cost of defaults to
U.S.  taxpayers.  The U.S.  Export-Import Bank considers country risk
as well as the repayment duration of loans in determining its fees,
which range as high as $5.70 per $100 of loan guarantee coverage. 


      GSM-102 PORTFOLIO EXPOSURE
      AND COSTS TO TAXPAYERS
-------------------------------------------------------- Chapter 0:4.5

At the end of January 1993, principal owed by the FSU, Russia, and
Ukraine on GSM-102 guaranteed debt equaled about $3.6 billion.  On
the basis of an analysis of several independent ratings of the
financial, economic, and political risk associated with lending to
the various GSM-102 recipient countries, GAO estimated that the FSU
and its successor states accounted for about 59 percent of the
GSM-102 portfolio's risk at that time--even though they accounted for
only 44 percent of the outstanding principal. 

In the latter part of 1992, Russia began to default on payments for
GSM-102 debt, causing USDA to suspend Russia's GSM-102 program.  By
the end of September 1993, net defaults on FSU and Russian debt
totaled nearly $1.1 billion, and CCC had paid out more than $1
billion to settle claims of banks that had made the loans.  On
September 30, 1993, the United States completed an agreement to
reschedule about $1.1 billion of GSM-102 debt.  Under the agreement,
Russia paid approximately $444 million in unrescheduled arrears by
the end of 1993.  During fiscal year 1993, USDA programmed about $1.4
billion in subsidized and donated food assistance to Russia and other
successor states, helping to offset the loss of GSM-102
credit-guaranteed food imports. 

During early 1994, Russia again fell into default on GSM-102 debt. 
During February, USDA agreed to reschedule $344 million in payments
due during January 1 through April 30.  In early June, USDA agreed to
reschedule another $517 million in payments due during May 1 through
December 31, 1994.  Following the June rescheduling, Russia owed
about $2.9 billion in principal on GSM-102 debt for the FSU and
itself.  Based on analysis of country risk ratings and secondary
market ratings, GAO estimated that about $2 billion-$2.2 billion of
this amount was at risk of default. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

This report contains no recommendations. 


   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
---------------------------------------------------------- Chapter 0:6

If Congress concludes that Russia or other successor states are too
risky to receive additional GSM-102 credit guarantees, and if
Congress concludes that continued agricultural exports to the states
serve important U.S.  economic and national security interests,
Congress may wish to consider authorizing additional foreign aid to
finance the sale of the food.  Such additional authorization of
foreign aid to finance food exports to the states could then be
weighed against other priorities for U.S.  foreign economic
assistance

To reduce future exposure of the GSM-102 portfolio to default,
Congress may wish to consider limiting the total amount of credit
guarantees that can be issued each year to high-risk countries and
the amount that can be provided to any single high-risk country.  In
addition, Congress may wish to consider (1) amending the statutory
provision that precludes CCC from charging a fee in excess of 1
percent of the amount of the credit guarantee and (2) requiring the
corporation to include a risk-based charge as part of its overall fee
for GSM credit guarantees.  Such fees could help offset the cost of
potential defaults to taxpayers and equalize the value of the
guarantees across all client countries. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:7

USDA commented on a draft of this report.  In general, it said that
the draft accurately presented the subject matter and USDA views
expressed to GAO during the review.  Most of USDA's comments are
summarized and evaluated in chapter 6 and reproduced in appendix III. 
Other comments are incorporated in the report as appropriate. 

USDA disagreed with GAO's draft conclusion that all of the FSU
successor states were not creditworthy and said that its analysis had
identified several states as being creditworthy.  GAO recognizes that
creditworthiness evaluations involve a multidimensional analysis of a
variety of factors and some subjective judgment.  As a result,
evaluations by different parties may not always fully agree. 
Consequently, GAO restated its conclusion to say that most, if not
all, successor states to the FSU are not creditworthy.  USDA also
disagreed with GAO's use of the secondary market for valuing FSU debt
in assessing risk involved in lending to the FSU.  USDA said it did
not believe the secondary market is a reliable indicator of the value
of FSU debt.  GAO continues to believe that the secondary market is
an appropriate method for valuing FSU debt.  Chapters 5 and 6 include
additional analysis supporting the use of this method. 

USDA did not express any view regarding GAO's suggestions on how
Congress could reduce future exposure of the GSM-102 portfolio to
default.  USDA agreed with GAO's suggestion that if Congress
concludes that additional GSM-102 guarantees are not appropriate for
Russia at this time, it might consider authorizing additional foreign
aid to finance export sales. 


INTRODUCTION
============================================================ Chapter 1

Two Department of Agriculture (USDA) programs--the Office of the
General Sales Manager (GSM)-102 and GSM-103 export credit guarantee
programs--are intended to promote the export of U.S.  agricultural
commodities.  The programs' goals--under the 1990 Food, Agriculture,
Conservation, and Trade Act,\1 also known as the 1990 Farm Bill--are
to develop, expand, or maintain U.S.  agricultural markets overseas
by facilitating commercial export sales of U.S.  agricultural
commodities.\2 However, the statute also provides that the Secretary
of Agriculture may not issue credit guarantees in connection with
sales of agricultural commodities to any country that the Secretary
determines cannot adequately service the debt associated with such
sale.  The law also prohibits issuing the credit guarantees for
foreign aid, foreign policy, or debt-rescheduling purposes. 

More than $16 billion in export credit guarantees were provided by
the GSM-102/103 programs during fiscal years (FY) 1990 through 1992. 
The former Soviet Union (FSU) and two of its successor states, Russia
and Ukraine, received 43 percent of the guarantees that were made
available in fiscal year 1992.  During fiscal year 1991 and fiscal
year 1992, the FSU obtained more GSM credit guarantees than any other
country in the world. 

In deciding whether to extend GSM export credit guarantees to any
country, USDA considers the prospects for developing and maintaining
U.S.  markets in that country, on the basis of our review of USDA
documents and interviews with agency officials.  Before providing
guarantees, USDA also assesses the country's overall
creditworthiness.  Creditworthiness, in the context of this report,
concerns a country's ability and willingness to service or make
timely payments on its current and future foreign debt obligations. 

Assessing the creditworthiness of nations generally involves a
technical analysis of economic and financial indicators of the risk
of nonpayment due to insufficient foreign currency and the likelihood
that political or other nonfinancial events may disrupt payments. 
Some of the factors that affect creditworthiness are a country's
level of indebtedness relative to its economic and financial
resources, the ability of the country's government to effectively
manage the domestic economy, and the general economic and political
situation in the country.  Creditworthiness also involves temporal
considerations.  For example, some debtors may be judged not
creditworthy over the short run due to a lack of readily available
foreign exchange but may be considered capable of servicing their
debts if additional time is allowed for them to organize and marshal
their resources. 


--------------------
\1 P.L.  101-624. 

\2 GSM-102, the Export Credit Guarantee Program, allows foreign
buyers to purchase U.S.  agricultural commodities from private U.S. 
exporters, with U.S.  banks providing financing with terms up to 3
years.  GSM-103, the Intermediate Export Credit Guarantee Program, is
similar to the GSM-102 program, except that terms of credit generally
have a repayment period exceeding 3 years, but no more than 10 years. 


   GSM EXPORT CREDIT GUARANTEE
   PROGRAMS
---------------------------------------------------------- Chapter 1:1

The Department of Agriculture's GSM-102 and GSM-103 programs are
aimed at facilitating the export of U.S.  agricultural commodities to
developing countries and middle-income countries with hard currency\3
shortages.  They are intended to help importing nations make a
transition from concessional financing\4 to cash purchases, as well
as to maintain import levels during periods of financial
difficulties. 

Under the two programs, the U.S.  government agrees to pay U.S. 
exporters or their assignees--U.S.  banks or U.S.  subsidiaries of
foreign banks--in the event that a foreign buyer defaults on its loan
obligation.  By reducing the risk involved in selling U.S. 
agricultural products, USDA encourages exporters to explore new
foreign market opportunities. 

The USDA's Commodity Credit Corporation (CCC), which administers the
GSM programs, attempts to share some of the credit risk with the
exporter or the exporter's assignee (a bank or other financial
institution).  It does so usually by guaranteeing 98 percent of the
value of the sale plus a portion of the interest payable.  The
exporter or the exporter's assignee is at risk for 2 percent of the
principal and a portion of the interest payable.  However, CCC has
flexibility to adjust the amount of guarantee coverage it provides. 
USDA considers the GSM programs to be fully "commercial" in that they
assist sales that are made by the private sector, and the interest
rates are at "prevailing market levels." However, there is an
important element of concessionality in the programs because
recipient countries could not make the purchases without credit and
loan guarantees.  Furthermore, if the countries were able to obtain
financing on commercial markets, they would have to pay a premium
above the rates that they obtain from the GSM programs, since a U.S. 
government guarantee reduces the risk to the lender. 


--------------------
\3 Hard currencies, such as U.S.  dollars or German marks, are those
currencies typically accepted by a wide range of nations as mediums
of exchange for international trade.  Hard currencies are also used
by countries to settle their foreign debts. 

\4 Concessional financing occurs when the interest rates are below
market rates and/or the repayment terms are considerably longer than
those that can be obtained on the commercial market. 


      DEBT-SERVICING REQUIREMENTS
      AND POSSIBLE BUDGETARY
      IMPACTS
-------------------------------------------------------- Chapter 1:1.1

Section 202(f) of the 1990 Food, Agriculture, Conservation, and Trade
Act prohibits the Secretary of Agriculture from issuing export credit
guarantees in connection with sales of agricultural commodities to
any country that the Secretary determines cannot adequately service
the debt associated with such a sale.  The provision was established
in response to a situation that developed in the late 1980s and early
1990 when creditworthiness considerations were minimized for foreign
policy objectives in order to provide Iraq with GSM export credit
guarantees.  Following the allied response to Iraq's invasion of
Kuwait in 1990, Iraq defaulted on outstanding guaranteed GSM loans. 
As of August 17, 1994, CCC had received claims from 10 banks
regarding Iraq's defaults.  These claims totaled about $2.2 billion,
and CCC had paid claims to nine of these banks, totaling $1.7
billion. 

Section 202 (f) requires USDA to determine whether a country is
capable of servicing the debt that would result from providing export
credit guarantees for agricultural commodities.  If a determination
is negative, the provision prohibits USDA from making credit
guarantees available to that country.  USDA advised us that before
making any loan guarantee commitments, it assesses the
creditworthiness of intended recipients of guaranteed sales and uses
the information in deciding whether to provide guarantees to specific
countries. 

In contrast to a direct loan, a credit guarantee does not involve
dollar outlays to either the lender or the borrower when the loan is
made.  Nonetheless, budgetary outlays are required for loan
guarantees when defaults occur and claims are made.  To better
account for the costs of federal credit programs, the Federal Credit
Reform Act of 1990\5 required, beginning with fiscal year 1992, that
the President's budget reflect the costs of the loan guarantee
programs.  To this end, new loan guarantee commitments can be
undertaken only if appropriations of budget authority are made to
cover their costs, including estimated payments by the government to
cover defaults and delinquencies. 

The act exempted all then-existing CCC credit guarantee programs from
the appropriations requirement.  However, CCC advised us that it is
establishing what it calls an "allowance reserve" to cover its
estimate of possible defaults on GSM loans.  As of June 30, 1992, CCC
had approximately $9.04 billion outstanding in GSM-102 and 103
guarantees on loan principal and $4.51 billion in accounts receivable
from loan guarantee payouts on delinquent GSM-102 and 103 guaranteed
loans.  In a December 1992 report, we estimated the cumulative costs
of the programs at about $6.5 billion, or 48 percent of the total
$13.55 billion, if the programs had been terminated on June 30,
1992.\6


--------------------
\5 P.L.  101-508. 

\6 Loan Guarantees:  Export Credit Guarantee Programs' Costs Are High
(GAO/GGD-93-45, Dec.  22, 1992).  In its financial statement for the
period ending September 30, 1991, CCC estimated a percentage cost for
its GSM programs of 30.9 percent.  Our estimate differed from theirs
because ours (1) was based on more current information and (2) used
"mark-to-market techniques" so that the value estimates were more
closely tied to secondary market prices rather than an analyst's
subjective judgment.  See chapter 5 for a discussion of secondary
market prices. 


      FOREIGN POLICY
      CONSIDERATIONS
-------------------------------------------------------- Chapter 1:1.2

In the past, decisions to provide GSM loan guarantees to countries
were influenced by foreign policy considerations.  Principal
recipients of guarantees were often countries that had significant
foreign policy relationships with the United States.\7 However, the
1990 Farm Bill stipulated that GSM export credit guarantees could not
be used for foreign aid, foreign policy, or debt-rescheduling
purposes.  So, for example, if the Secretary of Agriculture
determines under the debt-servicing requirement that a country cannot
adequately service the debt that would arise from receiving
agricultural export credit guarantees, no credits are to be
extended--even if the president believes that such an extension would
be in the national interest. 

Despite the problems that arose from the Iraqi loan guarantees, as
cited earlier, many Members of Congress have expressed the view that
GSM credit guarantee decisions should take account of foreign policy
and national interest considerations.  For example, in May 1991 the
Senate approved a nonbinding resolution (S.  Res.  117) recommending
that the administration extend another $1.5 billion in agricultural
credit guarantees to the Soviet Union--assuming the administration
found the country could service the debt--if certain foreign policy
objectives would also be realized.\8

In 1991, attempts were made to provide more flexibility in granting
export credit guarantees; amendments to the 1990 Farm Bill were
proposed that would have allowed the president to provide guarantees
when he believes they are in the national interest, regardless of the
debt-servicing requirement and foreign aid/policy restrictions. 
However, these amendments were subsequently withdrawn.  Similarly,
the administration's 1992 bill for authorizing assistance to the
former Soviet republics\9

included a provision allowing the Secretary of Agriculture to take
into account major economic reforms underway in those states in
making a determination about the ability of the states to repay debt
associated with GSM sales.  However, this provision was struck from
the bill that Congress passed in October 1992. 

USDA officials told us that although the 1990 Farm Bill prohibits the
Secretary of Agriculture from issuing export credit guarantees for
foreign aid or foreign policy purposes, the law does not mean that
such assistance cannot simultaneously serve foreign policy
objectives.  They noted that during congressional hearings held in
late 1991 and in related briefings provided by USDA to congressional
staff, the principal congressional focus with regard to agricultural
credit guarantees was on keeping U.S.  food moving to the FSU rather
than on the risks associated with providing the guarantees. 


--------------------
\7 GAO/GGD-93-45. 

\8 As an example of foreign policy objectives, the resolution urged
the administration not to extend guarantees unless it secured clear
and binding assurances from the then-Soviet government that the
government would not use the guarantees to support the military,
security, or Communist Party apparatus at the expense of helping the
Soviet people. 

\9 The former Soviet Union, or Union of Soviet Socialist Republics
(USSR), included 15 republics:  Armenia, Azerbaijan, Byelorussia,
Estonia, Georgia, Latvia, Lithuania, Kazakhstan, Kirghizia, Moldavia,
Russia, Tadzhikistan, Turkmenistan, Ukraine, and Uzbekistan. 


      GSM-102 AND GSM-103 SALES BY
      COUNTRY AND COMMODITY, 1990
      THROUGH 1992
-------------------------------------------------------- Chapter 1:1.3

Table 1.1 provides information on GSM program sales by country for
fiscal years 1990, 1991, and 1992.  As shown, total GSM-102 credit
guarantees were $4.6 billion in fiscal year 1990, $5 billion in
fiscal year 1991, and $6.1 billion in fiscal year 1992.  The GSM-103
program accounted for about $1 billion in guarantees during fiscal
years 1990 through 1992.  The table also shows that whereas the FSU
received no GSM credit guarantees in fiscal year 1990, it was the
major recipient in fiscal year 1991.  In fiscal year 1992, the FSU
and Russia, collectively, received more guarantees than any other
nation. 



                                    Table 1.1
                     
                       GSM-102/103 Export Credit Guarantee
                     Commitments by Countries, FY 1990-92 (by
                      Percent Distribution and Total Dollar
                                   Commitments)


                                           Total 1990-  Total 1990-  Total 1990-
Country              1990    1991    1992           92           92           92
-----------------  ------  ------  ------  -----------  -----------  -----------
FSU/successors\a        -     38%     43%          29%            -          27%
Mexico                33%      25      22           26           2%           25
Algeria                16      13       9           12           28           13
Korea                  12      10       8           10            -            9
Pakistan                6       2       4            4            -            4
Iraq                   11       -       -            3            -            3
Venezuela               2       2       3            2            2            2
Morocco                 -       -       -            -           25            2
Colombia                3       1       1            2            -            2
Turkey                  3       1       1            2            -            2
Tunisia                 1       -       1            1           14            1
Egypt                   4       -       1            2            -            1
Ecuador                 3       1       1            1            -            1
Jordan                  1       -       -            -           14            1
Trinidad & Tobago       1       1       1            1            -            1
Sri Lanka               -       1       -            -            1            1
Others                  4       3       5            4            5            4
================================================================================
Total                100%    100%    100%         100%         100%         100%
Total commitments    $4.6    $5.0    $6.1        $15.7         $1.0        $16.8
 ($ in billions)
--------------------------------------------------------------------------------
Legend:   = no guarantees were committed. 

Note 1:  Countries are listed in descending order based on percent
share of GSM-102/103 guarantees committed (i.e., offered) by CCC
during 1990-92.  Actual exports may be less than commitments. 

Note 2:  Percentages may not add to 100 due to rounding. 

\a In fiscal year 1992, 30 percent of GSM-102 guarantees went to the
former Soviet Union, 11 percent to Russia, and 2 percent to Ukraine. 

Source:  USDA's Foreign Agricultural Service (FAS).  Percentages
calculated by GAO. 

Table 1.2 depicts the distribution of GSM-102 and 103 sales by type
of commodity for fiscal years 1990, 1991, and 1992.  As the table
shows, wheat, yellow corn, and soybeans and soybean meal accounted
for the majority of sales. 



                                    Table 1.2
                     
                      Value of GSM-102/103 Exports by Major
                             Commodities, FY 1990-92

                              (Dollars in millions)

                                                               1990-
Commodities                             1990    1991    1992      92     Percent
------------------------------------  ------  ------  ------  ------  ----------
Wheat                                 $1,204  $797.8  $1,756  $3,759         27%
                                          .2              .9
Yellow corn                            860.9  1,372.  1,090.   3,324          24
                                                   0       6
Soybeans                               289.2   482.3   652.0   1,423          10
Soybean meal                           252.1   426.6   651.8   1,331           9
Grain sorghum                          243.6   271.1   386.6     901           6
Cotton                                 202.3   210.8   240.6     654           5
Rice                                   223.4    44.5    55.0     323           2
Soybean oil                            123.4    65.6    98.4     287           2
Tallow                                 104.3    63.4    64.3     232           2
Wood pulp                               79.7    59.4    57.1     196           1
Lumber                                 114.5    49.3    23.8     188           1
Barley                                  91.2     6.6    46.9     145           1
Sunflowerseed oil                       35.8    25.3    78.9     140           1
Beans, dry edible                       96.6       -    25.2     122           1
Wheat flour                             73.0     3.8    33.4     110           1
Milk, nonfat dry                        25.3     4.6    56.0      86           1
Poultry meat                             1.3    25.1    52.2      79           1
All other                              318.0   234.1   173.4     725           5
================================================================================
Total                                 $4,338  $4,142  $5,543  $14,02        100%
                                          .9      .6      .0       4
--------------------------------------------------------------------------------
Legend:   = none

Note 1:  Individual commodities selected and listed in descending
order based on total sales from fiscal year 1990 to fiscal year 1992. 

Note 2:  Data are based on commodities registered for export by CCC. 
Export registrations may be less than CCC guarantees offered. 

Note 3:  Commodity value as a percent of total value for all
commodities. 

Note 4:  Dollars and percentages may not add to totals due to
rounding. 

Source:  USDA'S Foreign Agriculture Service (FAS).  Percentage
calculations by GAO. 


   USDA CRITERIA FOR ASSESSING
   CREDITWORTHINESS
---------------------------------------------------------- Chapter 1:2

Within USDA, the Trade and Economic Information Division (TEID) of
the Foreign Agricultural Service (FAS) is responsible for analyzing
the ability and willingness of countries that have requested GSM-102
export credit guarantees to meet their current and future external
debts, including potential GSM debt. 

TEID evaluates creditworthiness in terms of whether a country is able
and willing to service its current and future foreign debt
obligations.  Access to sufficient hard currency is seen as the key
to whether a country is capable of servicing debt (principal and
interest payments).  TEID notes that external debt can be serviced
through revenues derived from a country's current account,\10 from
foreign exchange received from debt and investment inflows, or from a
drawdown of a country's existing stock of foreign exchange reserves. 
Important factors that affect a country's ability to service its
debts, TEID says, include the status of the current account balance;
the volume of trade; the variability in current receipts; the size of
international reserves; the country's access to capital account
inflows, either from net direct investment, foreign borrowing, or
foreign aid; and the country's ability to reduce its imports of goods
and services. 

TEID's approach also includes a review of the general economic and
political situation of countries.  If a country's economy is in a
steep decline, its ability to earn foreign exchange from exports may
be severely impaired.  If the political system is unstable or if a
country is subject to external threats to its sovereignty, concerns
may arise about the country's willingness or ability to meet its
future debt obligations. 

The 1990 Farm Bill provision restricting when GSM-102 credit
guarantees can be extended does not include a general
creditworthiness standard.  Rather, it requires that the Secretary of
Agriculture determine whether a prospective borrowing country is
capable of adequately servicing the debt associated with a specific,
proposed GSM-102 sale to that country before issuing a credit
guarantee.  However, if a country is experiencing problems in
servicing its debts or is likely to in the near future, any
particular debt obligation (including a GSM loan), in our view, could
result in default. 

A country with low creditworthiness may be able to adequately service
the debt associated with a particular GSM-102 sale if the country is
willing to assign a priority to repayment of that debt (i.e., to not
treat other creditors equally).  In fact, USDA officials told us that
the U.S.  decision to extend substantial export credit guarantees to
the FSU during 1991 was partly based on the assumption that the
Soviet government would give preferential treatment to GSM-102 debt. 
U.S.  officials reasoned that food was a high-priority item.  Without
adequate supplies of food, political stability could be threatened. 
Moreover, Soviet and, subsequently, Russian leaders knew that if they
fell into arrears on payments for GSM-102 guaranteed sales, the
GSM-102 program would be suspended.  Thus, they had an incentive to
keep current on GSM-102 debt repayments if they wanted to secure
future GSM credit guarantees.\11

However, even if a borrowing country is willing to give preferential
treatment to particular debts, creditor nations must pay close
attention to its creditworthiness more generally.  For example, if a
prospective borrower country has low creditworthiness and its
problems worsen, it may find it necessary to reschedule its debts. 
Under the normal rules of international debt restructuring, all
official creditors (i.e., creditor country governments) are to be
treated equally.  Therefore, particular debts should not receive
preferential treatment. 


--------------------
\10 The current account consists of commodity exports, reexports and
imports, services (such as tourism, banking, insurance, and
transportation), profits earned abroad, and interest.  It also
includes unilateral transfers, such as grants of foreign aid or
gifts.  A current account deficit indicates that a country is
spending more abroad than it is earning abroad. 

\11 During our field work in the FSU in spring 1992, Russian
officials said that GSM-102 debt was receiving preferential treatment
because food was a priority item.  However, as discussed shortly,
Russia subsequently defaulted on large amounts of the debt. 


      EXPOSURE GUIDELINES
-------------------------------------------------------- Chapter 1:2.1

In addition to evaluating the creditworthiness of potential GSM
credit guarantees, TEID establishes annual and total risk exposure
guidelines to provide USDA with a yardstick for limiting its risk
exposure in specific countries.  The total exposure guideline for a
country is TEID's recommended maximum dollar amount of GSM-guaranteed
principal, rescheduled principal, interest arrears, and claims that
the country should owe CCC at a given time. 


      DECISIONMAKING PROCESS
-------------------------------------------------------- Chapter 1:2.2

TEID's country risk grades and exposure guidelines are used in USDA's
decisionmaking process for allocating credits to requesting
countries.  However, TEID's recommendations about whether to extend
credit and, if so, how much, are not binding on the agency.  USDA
considers not only the risk of providing loan guarantees but also the
potential for expanding or maintaining U.S.  markets overseas.  A
Reconciliation Committee, consisting of representatives from TEID and
several other USDA offices, meets and discusses both the risk of
lending to a foreign country and the prospects for developing and
maintaining U.S.  markets in that country.  A recommendation is
developed in committee.  According to USDA officials, decisions about
which countries should receive credit guarantees and in what amounts
may be made by the Assistant General Sales Manager or the General
Sales Manager, but sometimes the decisions are elevated to the level
of the Under Secretary for International Affairs and Commodity
Programs. 

The National Advisory Council (NAC) on International Monetary and
Financial Policies also provides advice to USDA on GSM credit
guarantee actions.\12 USDA sends all GSM-102/103 proposals to NAC for
review.  Proposals are submitted after USDA has conducted its own
risk analysis on a country in question.  NAC's recommendations are
only advisory in nature and do not necessarily reflect fiscal risk. 
However, we were told that USDA does not typically challenge NAC
recommendations unless the Treasury or the State Department are not
in the majority when a vote on a recommendation is taken. 


--------------------
\12 NAC guides and advises U.S.  government agencies involved in
making foreign loans or engaged in foreign financial, exchange, or
monetary transactions.  Besides coordinating the actions of U.S. 
agencies, NAC ensures, when possible, that the actions of
international financial institutions are consistent with U.S. 
policies and goals.  However, despite its title, NAC positions are
not limited to monetary and financial issues.  Members are allowed to
vote on the basis of their respective agency interests, expertise,
and alliances.  NAC membership consists of the Secretaries of the
Treasury (who also serves as the chair), State, and Commerce; the
U.S.  Trade Representative; the Chairman of the Board of Governors of
the Federal Reserve System; the President and Chairman of the Board
of Directors of the U.S.  Export-Import Bank; and the Director of the
International Development Cooperation Agency. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:3

The Ranking Minority Member of the Senate Committee on Agriculture,
Nutrition, and Forestry asked us to assess the creditworthiness of
the FSU and its 15 successor states.\13 The FSU's 15 republics became
independent states between August and December 1991, as part of the
historic change that swept across the Soviet Union in the late 1980s
and early 1990s.  This change culminated in the collapse of the
Soviet empire and the demise of the Communist Party.\14 The successor
states are Armenia, Azerbaijan, Belarus, Estonia, Georgia,
Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, Russia,
Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.\15 (See fig.  1.1
for a map showing the location of the states). 

   Figure 1.1:  Map of the Former
   Soviet Union and Its Successor
   States

   (See figure in printed
   edition.)

   Source:  International Monetary
   Fund.

   (See figure in printed
   edition.)

We analyzed the creditworthiness of the FSU and its 15 successor
states from a variety of perspectives, including debt burden, gross
financial requirements, liquidity, secondary market valuations of FSU
debt, and country risk analyses.  In addition, we (1) considered the
general economic and political environment in the FSU and its
successor states; (2) reviewed how the Soviet debt crisis developed
and the relationship between debt problems, on the one hand, and
economic reform and creditworthiness on the other; (3) examined how
USDA assessments of creditworthiness and market considerations
affected USDA's decisions on providing the FSU/successor states with
credit guarantees; and (4) estimated the exposure of the GSM-102
portfolio to default by the FSU and its successor states. 

To assess the creditworthiness of the FSU and its successor states,
we (1) analyzed their debt burden and liquidity situations, using
historical and forecast data; (2) considered the importance of
arrears, debt relief, and International Monetary Fund (IMF)
arrangements as measures of creditworthiness; (3) applied USDA/TEID
criteria for measuring the relative creditworthiness of countries to
the successor states; (4) reviewed secondary market prices of FSU
loans and bonds; and (5) analyzed several country risk ratings of the
creditworthiness of the FSU and its successor states, including
preparing a composite rating for each of the states. 

To examine the role of U.S.  agricultural exports to the FSU and its
successor states and the use of GSM-102 credit guarantees to promote
such trade, we analyzed USDA data and related information on U.S. 
agricultural exports generally and GSM export credit guarantees more
specifically.  To assess the development of the Soviet debt crisis,
we reviewed information on debt-servicing problems and efforts by the
Group of Seven (G-7) industrialized nations\16 and international
institutions to provide financial assistance to help alleviate those
problems.  In reviewing the economic and political situation in the
FSU and its successor states, we examined data and information on
economic conditions and political events during recent years and
considered the views of a number of experts and U.S.  government
agencies.  To assess the exposure of the GSM-102 portfolio to default
by the FSU and its successor states, we analyzed GSM-102 data on
outstanding principal owed by all GSM-102 recipients, including
weighting the data according to country risk evaluations of the
creditworthiness of the recipients.  In addition, we used data on
secondary market prices of FSU loans and country risk ratings to
estimate the risk of default on external debt of the successor
states.  The secondary market expresses the value of a country's loan
as a percentage of its face value.  The extent to which a loan's
value is discounted in the secondary market indicates how the
financial market assesses the risk of default.  We estimated the
default risk by subtracting a country's secondary market price from
$1 and dividing the result by 100.  A similar technique was used for
country risk ratings. 

In conducting our review, we interviewed representatives of the U.S. 
Departments of Agriculture, State, and the Treasury.  We also
conducted field work in five of the FSU's successor states (Belarus,
Kazakhstan, Russia, Ukraine, and Uzbekistan) and in Paris, Bonn, and
Brussels.  In the latter three cities, we met with representatives of
the French and German governments and the European Union. 

We also reviewed U.S.  legislation relating to GSM-102/103 programs,
as well as other government documents and documents of the World Bank
and IMF, and private sector ratings of country risk and
creditworthiness.  In addition, we reviewed information on violent
conflicts that have affected Russia and other successor states (see
app.  I) and compared the debt burden of countries to debt payment
problems, IMF arrangements, and debt relief agreements (see app. 
II). 

We obtained comments from the Department of Agriculture on a draft of
this report (see app.  III).  We summarize and evaluate most of
USDA's comments in chapter 6, and some comments are addressed
directly in other chapters of this report. 

We did our work between April 1992 and December 1994 in accordance
with generally accepted government auditing standards. 


--------------------
\13 The requester also asked us to assess the (1) status of
agricultural reforms in the NIS; (2) relationship, if any, between
GSM-102 credit guarantees and agricultural reforms; (3) whether food
provided under GSM-102 credit guarantees was distributed equitably
among the FSU republics prior to the dissolution of the Soviet Union;
and (4) the food situation in the NIS.  These issues were addressed
in a separate GAO report.  See Former Soviet Union:  Agricultural
Reform and Food Situation in Its Successor States (GAO/GGD-94-17,
Nov.  19, 1993). 

\14 In August 1991, some of the highest officials of the USSR's
Communist Party, internal security apparatus, and the armed forces
launched a coup for the purpose of forestalling signing of a new
union treaty that would have radically shifted power from the central
government to the republics.  The coup failed.  Thereafter,
disintegration of the USSR's central political authority and the
economy continued.  In early September 1991 the central government
recognized the full independence of the Baltic states of Estonia,
Latvia, and Lithuania.  On December 8, Russia, Ukraine, and Belarus
declared that the Soviet Union no longer existed and signed an
agreement to form a Commonwealth of Independent States (CIS)--for the
purpose of coordinating policies on nuclear weapons and other defense
issues, economic reform, banking, energy, transportation, rights of
national minorities, and cultural affairs.  On December 21, they were
joined by eight other republics.  (The three Baltic states and
Georgia chose not to join.  However, as discussed in ch.  4, Georgia
joined in 1993.) The dissolution of the Soviet Union was formalized
on December 25, 1991, when Mikhail Gorbachev resigned as President
and on December 26 when the Soviet legislature dissolved itself. 

\15 In this report, the term "former Soviet Union" (FSU) includes all
15 former republics, and the term "successor states" refers to the
states that succeeded the republics following the end of the Soviet
Union.  The term "newly independent states" (NIS), a term used by the
Department of State, includes all of the successor states except for
the three Baltic countries.  (The United States never recognized the
Soviet Union's annexation of the Baltic states in 1940.)

\16 Canada, France, Germany, Italy, Japan, United Kingdom, and the
United States. 


U.S.  AGRICULTURAL TRADE WITH THE
FORMER SOVIET UNION AND ROLE OF
THE GSM-102 PROGRAM
============================================================ Chapter 2

The FSU has been a major purchaser of U.S.  bulk\1 agricultural
exports since 1972; until 1991, it usually made such purchases with
cash.  However, owing to its increasing financial difficulties (see
ch.  3), in the latter part of 1990 the Soviets sought export credits
to finance their imports of commodities and food products.  The
United States responded positively.  Between December 1990 and
September 30, 1993, the United States offered to provide up to $5.97
billion in GSM-102 export credit guarantees to the FSU and those
successor states that qualified for the program.  As of September 30,
1993, $5.02 billion had been provided, $0.949 billion was no longer
available to the FSU, and $3.85 billion was still owed to the United
States on FSU credit-guaranteed purchases. 

As a result of these sizable guarantees, the GSM-102 program has
become heavily exposed to default by Russia, which has undertaken the
responsibility as guarantor of the debt of the FSU.  Guaranteed sales
to the FSU and/or its successor states accounted for 38 percent of
all GSM sales in fiscal year 1991 and 43 percent in fiscal year 1992
(including Russia and Ukraine).  The FSU and its successor states now
hold the largest portion of all outstanding GSM-102/103 loan
guarantees.  In late November 1992, Russia began missing payments due
on GSM-102 debt for the FSU.  By the end of September 1993, Russian
defaults on FSU and Russian debt totaled nearly $1.1 billion.  At
that time, the United States agreed to reschedule $1.1 billion of
GSM-102 debt.  In January 1994, Russia again fell into default on
GSM-102 loans.  By early June 1994, the United States had agreed to
reschedule another $882 million. 


--------------------
\1 Bulk commodities include unprocessed grains and other raw
agricultural products that do not require specialized transportation. 


   BACKGROUND
---------------------------------------------------------- Chapter 2:1

As discussed in our 1993 report, the FSU was the world's largest
producer of wheat and one of the world's largest producers of grains
overall.\2 It was also a major producer of potatoes, sugar beets,
cotton, and sunflowers.  Despite its vast production of crops,
however, the FSU was a net importer of food.  Its imports averaged
just under $20 billion per year, about half of which was for grains
and sugar.  The need for extensive imports continued following the
dissolution of the Soviet Union in December 1991. 

We found that extensive food imports were necessary because the
states had been unable to efficiently harvest, store, process, and
distribute much of what was grown.\3 Difficulties associated with
each of these steps of the food production system combined to create
huge losses due to spoilage after crops were initially produced.  For
example, approximately 25 to 30 percent of grain and 30 to 50 percent
of potatoes and vegetables produced in the FSU and its successor
states were lost annually because of these problems.  Moreover, in
absolute terms, aggregate annual grain loss of the successor states
(excluding the Baltic states) was, on average, about 30 million to 40
million metric tons (mmt),\4

which was roughly equal to the size of their aggregate annual grain
imports. 

After 1985, the Soviet Union announced a series of initiatives to
reform agriculture, ranging from making changes in land ownership
laws to paying farmers hard currency for high-quality crops sold to
the state in excess of original state-contracted amounts.  However,
for a variety of reasons, these initiatives did not produce
substantive results.  By 1991, the availability of basic food
staples, such as potatoes, meat, and bread, was far worse than before
agricultural reforms were initiated.\5 As discussed in our 1993
report, following the dissolution of the Soviet Union, agricultural
reforms in the successor states proceeded slowly, with varied
progress among the states.  Reforms considered or undertaken in these
states included the liberalizing of food prices; restructuring of
state and collective farms; and privatizing of food production,
wholesale and retail trade, processing, storage, and transport. 
However, agricultural reform has been slow, in part because successor
state governments fear that rapid reform might lead to significant
production shortfalls and unemployment.  In turn, such disruptions
could cause food shortages and discontent that would threaten the
political and social stability needed by these governments to proceed
with reforms.  Our report also found that agricultural reforms have
been impeded by (1) bureaucratic resistance from some persons with
vested interests in the old central command system and (2) fear of
change by workers on state and collective farms. 


--------------------
\2 Unless otherwise noted, the material in this section is from our
recent report, GAO/GGD-94-17. 

\3 According to a USDA official, some successor states will likely
continue to require some food imports, even if food handling and
distribution inefficiencies are reduced.  This official said, for
example, that food production in Armenia and Kyrgyzstan is
constrained by their mountainous topographies, necessitating food
imports. 

\4 A metric ton equals 1.1 tons, or 2,200 pounds. 

\5 International Trade:  Soviet Agricultural Reform and the U.S. 
Government Response (GAO/NSIAD-91-52, June 28, 1991). 


   U.S.  TRADE WITH THE FSU
---------------------------------------------------------- Chapter 2:2

Since the early 1970s, the FSU was a major customer for U.S.  bulk
agricultural commodities, although U.S.  exports fluctuated greatly
from year to year.  The trade relationship was fostered by a series
of U.S.-Soviet long-term bilateral grain agreements.  Annual sales
varied in response to a variety of factors, including fluctuations in
Soviet agricultural production, changes in the nature of the
U.S.-Soviet political relationship, and competition from other
exporters of agricultural commodities. 

Table 2.1 shows U.S.  agricultural exports to the FSU and its
successor states as a percent of U.S.  agricultural exports to the
world, between 1976 and 1993 (percents were calculated on the basis
of the dollar value of the exports).  For the entire period, exports
to the FSU and its successor states accounted for 5.5 percent (on an
average annual basis) of the total value of U.S.  agricultural
exports to the world.  For the 1991-93 period, the average annual
share was 5.3 percent.  Grain and soybeans/soybean products accounted
for the large majority of U.S.  agricultural exports to the FSU and
its successor states. 



                               Table 2.1
                
                 U.S. Agricultural Exports to the FSU/
                 Successor States as a Percent of U.S.
                Agricultural Exports to the World, 1976-
                                   93

                         (Dollars in millions)

                                                          U.S. exports
                                                               to FSU/
                                                             successor
                            U.S. exports                   states as a
                                 to FSU/                    percent of
                               successor   U.S. exports     exports to
Year                              states   to the world      the world
-------------------------  -------------  -------------  -------------
1976                              $1,558        $22,978           6.8%
1977                               1,046         23,636            4.4
1978                               1,756         29,382            6.0
1979                               2,998         34,749            8.6
1980                               1,138         41,234            2.8
1981                               1,685         43,338            3.9
1982                               1,871         36,627            5.1
1983                               1,473         36,099            4.1
1984                               2,878         37,804            7.6
1985                               1,923         29,041            6.6
1986                                 658         26,222            2.5
1987                                 938         28,709            3.3
1988                               2,252         37,080            6.1
1989                               3,597         39,909            9.0
1990                               2,271         39,363            5.8
1991                               2,508         39,204            6.4
1992                               2,346         42,930            5.5
1993                               1,758         42,609            4.1
----------------------------------------------------------------------
Source:  USDA/Economic Research Service (ERS). 

Table 2.2 shows U.S.  corn, wheat, and soybean/soybean product
exports to the FSU and its successor states as a percent of the total
value of such commodity exports to the world between 1976 and 1993. 
The table shows that corn and wheat exports generally accounted for
10 percent or more of total U.S.  exports of the same commodities. 



                               Table 2.2
                
                U.S. Corn, Wheat, and Soybean Exports to
                the FSU/Successor States as a Percent of
                Total Exports of Such Commodities, 1976-
                                   93

Years                                         Corn   Wheat  Soybeans\a
------------------------------------------  ------  ------  ----------
1976-80\b                                    16.6%   10.2%        3.2%
1981-85\b                                     16.4    11.5         1.0
1986-90\b                                     18.6    11.3         6.0
1991                                          25.1    13.0        12.6
1992                                          14.1    21.1         7.0
1993                                          12.5    11.1         3.0
----------------------------------------------------------------------
Note:  Percents calculated using the value of exports in million U.S. 
dollars. 

\a Includes soybeans, soybean oil, and soybean meal. 

\b Average annual percentages. 

Source:  GAO analysis of ERS data. 


   GSM-102 SALES TO THE FSU AND
   ITS SUCCESSOR STATES
---------------------------------------------------------- Chapter 2:3

Beginning in the early 1970s, the FSU became more or less a permanent
grain importer.  Generally, through 1990, it was a cash customer when
it purchased U.S.  agricultural commodities.\6

However, during the last months of 1990, the Soviets sought to line
up export credits to purchase needed food from countries that
traditionally exported agricultural commodities to the Soviet Union. 
The Soviets needed such credits because they had a limited amount of
hard currency reserves available to purchase food and other items and
to finance their continuing trade deficit with nonsocialist
countries.\7

On December 12, 1990, the Secretary of Agriculture announced that $1
billion in GSM-102 export credit guarantees would be made available
for agricultural sales to the Soviet Union.  (January 1991 was the
first month in which guarantees were allocated for actual commodity
purchases.) The decision was made during a time of a food shortage in
the Soviet Union.\8 The U.S.  response to the Soviet Union's request
for assistance took place in the context of growing western efforts
to help the Soviet Union.  As of December 1990, Canada, France,
Germany, Italy, and Spain had announced about $3 billion in
agricultural credits to the Soviet Union for purchases in the
following months.  The United States had also stated its support for
the Soviet President's "perestroika" (restructuring) measures and
fundamental economic reform objectives.  When the GSM credits were
announced in December 1990, the White House Press Secretary said they
reflected the administration's desire to promote a continued positive
evolution in the U.S.-Soviet relationship.\9

In April 1991, the Soviet Union requested another $1.5 billion in
GSM-102 export credit guarantees for 1991.  However, the request
occurred at a time of growing concern about Soviet creditworthiness. 
In hearings held in May 1991, the Deputy Under Secretary for
International Affairs and Commodity Programs indicated to a
congressional committee that under the 1985 Farm Bill\10 it was quite
possible to consider the creditworthiness of a country suspect but
still proceed with a full GSM program for the country because market
development considerations outweighed the financial risk.  However,
he said, USDA believed that such an approach was no longer possible
and that as a result, USDA's flexibility in operating the credit
guarantee programs had been considerably limited.  As discussed in
chapter 1, the 1990 Farm Bill added the requirement that the
Secretary of Agriculture may not issue credit guarantees in
connection with sales of agricultural commodities to any country that
he determines cannot adequately service the debt associated with such
a sale. 

During May 1991, there was extensive debate in the Senate about
whether to provide additional credit guarantees to the Soviet Union. 
The debate focused on (1) whether the Soviet Union was creditworthy,
(2) what factors should be considered in assessing a country's
ability to repay GSM debt, (3) whether credit guarantees should be
provided or denied to the Soviet Union because of foreign policy
considerations, and (4) what the impact on the United States and U.S. 
farmers would be if guarantees were not provided and sales not made. 
On May 15, 1991, the Senate approved (by a vote of 70 to 28) a
nonbinding resolution (S.  Res.  117) that said that as the
administration evaluates the Soviet request, it should consider in
its evaluation such factors as whether the Soviets were able to
service current debt and whether the absence of U.S.  guarantees
would jeopardize U.S.  market development.  Similarly, on May 31,
1991, 37 members of the House Committee on Agriculture sent the
Secretary of Agriculture a letter that said the Secretary should
consider, among other factors, the U.S.  ability to access, maintain,
and develop markets for U.S.  agricultural products, including an
assessment of whether the absence of U.S.  credit guarantees would
jeopardize the ability to access and develop such markets.\11

In June 1991, the President approved the Soviet request for $1.5
billion in additional credit guarantees.  Subsequently, in July 1991,
USDA's Assistant General Sales Manager told us that the Senate
resolution and letters that USDA had received from Members of
Congress had provided helpful guidance on how to interpret the
requirements of the 1990 Farm Bill.  He said that without that
guidance, it is not clear whether USDA would have made a
determination that the Soviet Union was creditworthy.  The official
noted that the entire GSM program was predicated on making credit
available beyond what the private sector would provide. 

During the summer of 1991, increasing apprehension about the Soviet
Union's creditworthiness affected its ability to obtain financing for
U.S.  agricultural commodities--even for purchases backed by U.S. 
credit guarantees.  According to an official of Vnesheconombank
(VEB), the Soviet Bank for Foreign Economic Affairs, U.S.  commercial
banks no longer felt comfortable with the 98-percent guarantee
coverage that USDA typically offers.  The banks, he said, wanted CCC
to provide 100-percent coverage of the principal or have the
exporters absorb some of the risk. 

On September 24, 1991, CCC agreed to guarantee 100 percent of
principal.  Between then and the end of fiscal year 1993, all of the
credit guarantees to the FSU, Russia, and Ukraine included
100-percent coverage of the principal.\12 In comparison, none of the
other countries that received GSM-102 credit guarantees in fiscal
year 1991 through March 4 of fiscal year 1994 were provided more than
98-percent coverage. 

In November 1991, the White House announced that another $1.25
billion in credit guarantees was being made available, along with
$250 million in food aid and technical assistance.  The White House
said that the President's decision would help the Soviet Union, its
republics, and their peoples cope with immediate food shortages and
aid in the longer term restructuring of the country's food
distribution system.  However, owing to concern about whether the
Soviet Union would continue to exist, this commitment was not made
until after Russia and the other republics agreed to "joint and
several liability" for the debts of the Soviet Union.\13 In December
1991, the Soviet Union did dissolve.  At that time, a considerable
portion of the November GSM credit guarantees had not been allocated. 
CCC announced that the unused guarantees (about $650 million) would
be available for sale to any of the 12 republics.\14 However, all
sales for the unused guarantees went to the 12 states of the FSU as a
group.\15

In April 1992, the President announced that another $1.1 billion in
credit guarantees would be made available.  However, because several
of the successor states (particularly Russia and Ukraine) wanted
separate programs, USDA indicated that the guarantees would
henceforth be made on a bilateral basis.  Of the $1.1 billion
announced at that time, USDA said that $600 million was being
designated for Russia.  The remaining $500 million would be available
for Ukraine and the other states provided they met GSM-102 program
qualifications.  Only Ukraine received any of this commitment--$109
million.  According to a USDA official, the remaining $390 million is
no longer available.  In September 1992, USDA announced that $900
million in new guarantees was being made available to Russia for
fiscal year 1993.  One month later, USDA announced a commitment of
$200 million for Ukraine for fiscal year 1993.  Between January and
September 1993, USDA announced small amounts of credit guarantees for
Estonia ($5 million) and Uzbekistan ($15 million). 

Table 2.3 summarizes information on all GSM-102 commitments made to
the FSU and its successor states through September 30, 1993.  As the
table shows, U.S.-announced guarantees totaled $5.97 billion.  As of
September 30, 1993, $5.021 billion had been registered for export.\16
Of this, the FSU received $3.74 billion, Russia $1.06 billion,
Ukraine $199 million, and two other states a total of $20 million. 
The remaining $949 million in announced guarantees is no longer
available because the period of time during which the guarantees
could have been registered for export has expired. 



                                    Table 2.3
                     
                         GSM-102 Export Credit Guarantee
                        Announcements and Amounts Actually
                     Registered for Export to the FSU and Its
                      Successor States, as of September 30,
                                       1993

                              (Dollars in billions)


                  Amount
                  announ                  Others                  Ukrain
Date announced       ced     FSU  Russia      \b     FSU  Russia       e  Others
----------------  ------  ------  ------  ------  ------  ------  ------  ------
Dec. 90           $1.000  $1.000       -       -  $1.000       -       -       -
Jun. 91            1.500   1.500       -       -   1.497       -       -       -
Nov. 91            1.250   1.250       -       -   1.247       -       -       -
Apr. 92            1.100       -  $0.600  $0.500       -  $0.545  $0.109      $0
Sep. 92            0.900       -   0.900       -       -   0.513       -       -
Oct. 92            0.200       -       -   0.200       -       -   0.090       -
Feb. 93            0.005       -       -   0.005       -       -       -   0.005
Aug. 93            0.015       -       -   0.015       -       -       -   0.015
================================================================================
Total             $5.970  $3.750  $1.500  $0.720  $3.744  $1.058  $0.199  $0.020
--------------------------------------------------------------------------------
Legend:   Guarantees were not announced or registered. 

Note:  An announcement represents an expressed intention by USDA to
make guarantees available to the country or countries designated up
to the dollar amount specified.  It does not represent a binding
commitment.  After making an announcement, USDA announces an
allocation, which specifies commodities for which export guarantees
can be obtained and the total dollar amount of guarantees available
by commodity.  The dollar value of commodities actually registered
for export by CCC, and hence credit guaranteed, depends on the value
of the commodities that a designated country chooses to purchase and
whether the country meets GSM-102 program requirements for the full
value of those purchases. 

\a If the amount announced exceeds the dollar value of the amount
registered for export, the unused portion is no longer available. 
With regard to the April 1992 announcement and export registration
for Russia, the difference is $55 million.  CCC offered Russia direct
credit terms (comparable to the terms of GSM-102 credit guarantees)
for the purchase of $55 million of CCC stocks of butter.  Russia
actually purchased $21 million of butter under the offer. 

\b In April 1992, CCC announced $500 million for successor states
other than Russia; however, Ukraine was the only state to qualify for
any of these guarantees.  The October 1992 commitment of $200 million
was designated for Ukraine only.  USDA announced a $5-million
allocation for Estonia in February 1993 and a $15-million allocation
for Uzbekistan in August 1993. 

Source:  USDA/FAS. 


--------------------
\6 During 1972 through 1975, CCC made available $750 million in
credits to the FSU to be used to buy grains.  The FSU used about $550
million of these credits.  Offers of further U.S.  credits ended when
Congress passed the Jackson-Vanik amendment to the Trade Act of 1974
(P.L.  93-618).  This amendment barred access to U.S.  credit and
credit guarantee programs to countries that restrict emigration.  To
begin offering credit guarantees to the Soviet Union in 1990, the
President of the United States temporarily waived the freedom of
emigration provisions contained in the amendment. 

\7 According to USDA, Soviet hard currency earnings and reserves fell
during the 1980s as a result of declining world oil prices.  For
example, the Organization of Petroleum Exporting Countries' official
average sales price for a barrel of crude oil was $30.87 in 1980,
$23.49 in 1986, and averaged $17.71 during 1987 through 1989. 
Declining world oil prices adversely affected hard currency earnings
from Soviet oil exports.  See chapter 3 for a discussion of how hard
currency reserves became a problem in the FSU. 

\8 See the next section for a discussion about whether there was a
food shortage. 

\9 In commenting on a draft of this report, USDA said one could argue
that the main reason for Western assistance was to maintain markets. 

\10 The Food Security Act of 1985 (P.L.  99-198). 

\11 The Senate resolution and the House letter also urged the
administration to take into account (1) the country's present
situation in servicing similar government-to-government credit
guarantees, (2) the degree of exposure represented by the credit
guarantee request as a percentage of total financing available to the
country from other sources, (3) the country's repayment performance
on previous debt, and (4) the national assets that may ensure an
ability to repay debt. 

\12 Estonia and Uzbekistan received small amounts of guarantees in
fiscal year 1993 (see table 2.3) that included 98-percent coverage of
the principal. 

\13 Each state agreed that it would be jointly liable with the other
states for the debts of the Soviet Union and that it would assume
sole responsibility if the other states defaulted. 

\14 As discussed in chapter 1, the Soviet Union had recognized the
independence of the three Baltic states in September 1991. 

\15 In February 1992, member states of the CIS and Georgia signed an
agreement designating Russia as the guarantor and negotiator on
behalf of all in matters related to the use of foreign credits for
the purchase of food.  They also agreed to use two Moscow-based
foreign trade organizations to handle the food imports. 

\16 An export credit guarantee is considered issued when the export
is registered for sale with CCC and the exporter has paid a fee for
the service.  The exporter registers the dollar value of what he or
she thinks will be exported.  Actual shipments in total may be
somewhat lower than guarantees issued. 


      FISCAL YEAR 1994 GSM-102
      CREDIT GUARANTEES
-------------------------------------------------------- Chapter 2:3.1

During fiscal year 1994, USDA announced the availability of GSM-102
credit guarantees for successor states as follows:  Kazakhstan, $15
million; Ukraine, $40 million; Turkmenistan, $10 million; and
Uzbekistan, $15 million.  In each of these cases, CCC agreed to cover
only 98 percent of the principal.  For Kazakhstan, Turkmenistan, and
Uzbekistan, USDA required that principal repayments be made every 6
months.  For Ukraine, however, USDA indicated principal repayments
could be made annually.  Although USDA said it would make up to $40
million available for Ukraine, only $20 million was authorized during
the fiscal year. 

In addition to the above states, in September 1994, USDA announced it
was authorizing $20 million in GSM-102 credit guarantees for sales to
private sector buyers in Russia for fiscal year 1994.  The guarantees
offered to Russia were significantly different from guarantees
previously made available to the FSU and its successor states,
including Russia.  Under the terms of the announcement, the
guarantees could be effective for up to 90 days only rather than up
to 3 years.  The offer followed a long period during which Russia did
not receive any guarantees as a result of substantial defaults on its
GSM-102 credit-guaranteed loan payments (see later discussion in this
chapter). 

Total GSM-102 guarantees offered to the successor states in fiscal
year 1994 equalled $100 million, a small fraction of the amounts
offered in fiscal years 1991, 1992, and 1993.  (See table 2.3 and the
accompanying discussion.)


      WAS THERE A FOOD SHORTAGE? 
-------------------------------------------------------- Chapter 2:3.2

In commenting on a draft of this report, USDA said it is important to
clarify that there were no food shortages in the sense that the USSR
did not produce enough food.  Before the breakup of the USSR, USDA
said, shortages and long lines existed in state stores where prices
were controlled, resulting in "surplus demand" at those locations. 
No shortages existed in the farmer markets where prices were
relatively freely set and substantially higher than state-set prices. 
After the breakup of the Soviet Union, USDA said, price
liberalization led to higher prices, increasing the availability of
food by decreasing surplus demand. 

The primary problems facing the FSU in terms of food supply, USDA
said, are disruptions due to military conflict and the reduced
purchasing power of consumers, which has put some groups (such as the
elderly and unemployed) at risk.  Humanitarian assistance could
address, and in many cases has addressed, these problems.  USDA also
said that it would not characterize 1990 as a time of food shortages. 
It noted that the 1990 grain crop was one of the largest in history
and reiterated that the food problems in the Soviet Union were a
function of controlled prices and surplus demand, not a "shortage of
supply."

We do not disagree with USDA's description of what caused the food
problems in the FSU but believe that our use of the term "food
shortages" to characterize the situation in the FSU is consistent
with what both USDA and others were saying at the time.  For example,
on December 12, 1990, the White House issued a fact sheet that said
that the GSM-102 export credit guarantees being made available at
that time were a form of food assistance that "will help the Soviet
authorities address current food shortages." A Congressional Research
Service report of December 3, 1990, concluded that even with bumper
grain crops in the Soviet Union in the fall, food losses due to
harvesting and spoilage problems and a breakdown in food processing
and distribution systems had resulted in shortages of food products,
particularly in the larger Soviet cities and in remote areas far from
the major food producing regions.\17 Similarly, a May 1991 USDA
report on Soviet agriculture used the term food shortages several
times in describing food problems in the Soviet Union.\18


--------------------
\17 Soviet Food Shortages:  U.S.  Policy Options, Library of
Congress, Congressional Research Service (Washington, D.C.:  Dec.  3,
1990). 

\18 USSR Agriculture and Trade Report, USDA, Economic Research
Service (Washington, D.C.:  May 1991). 


      GSM SALES RELATIVE TO TOTAL
      U.S.  EXPORTS TO THE REGION
-------------------------------------------------------- Chapter 2:3.3

Since the beginning of 1991, most U.S.  agricultural exports to the
FSU and its successor states have been financed through GSM-102
credit guarantees.  For example, the United States exported $6.6
billion in agricultural commodities to the FSU during 1991 through
1993.  Between January 1991 and September 30, 1993, CCC registered
for export $5 billion in GSM-102 credit-guaranteed food. 

Table 2.4 shows that the principal GSM-102 commodity exports to the
FSU, Russia, and Ukraine have been grains (i.e., yellow corn and
wheat) and soybeans and soybean products (i.e., soybean meal and
soybean oil).  The table also shows that the GSM commodity exports to
the three countries accounted for a considerable portion of total
GSM-102 and 103 commodity exports to the world during fiscal years
1991 and 1992. 



                                    Table 2.4
                     
                     Value of GSM-102/103 Exports to the FSU/
                      Successor States and to the World, by
                        Commodities, Fiscal Years 1991-92

                              (Dollars in millions)


                    FSU/                FSU/                FSU/          Percen
Commodity     successors   World  successors   World  successors   World     t\a
------------  ----------  ------  ----------  ------  ----------  ------  ------
Yellow corn         $947  $1,372        $799  $1,091      $1,747  $2,463     71%
Wheat                202     798       1,101   1,757       1,303   2,555      51
Soybean meal         268     427         508     652         776   1,078      72
Soybeans             108     482         131     652         239   1,134      21
Poultry meat          21      25          28      52          49      77      64
Soybean oil            -      66          43      98          43     164      27
Barley                 -       7          36      47          36      54      67
Sunflower              -      25          27      79          27     104      26
 seed oil
Tallow                 -      63          20      64          20     128      16
Almonds                9       9           5       5          14      14     100
Rice                   -      45           8      55           8     100       8
Hops                   2       2           5       5           7       7     100
Soy isolates           -       -           6       6           6       6     100
Chicken                5       5           -       -           5       5     100
 franks
All other              -     818           -     980           -    1798       0
================================================================================
Total\b           $1,563  $4,143      $2,717  $5,543      $4,280  $9,686     44%
--------------------------------------------------------------------------------
Legend  = no exports

Note 1:  Successor states include Russia and Ukraine.  Specific
commodities shown include commodities that were sold to the FSU or
successor states.  Commodities are listed in rank descending order
based on the dollar value of sales to FSU/successors for fiscal year
1991-92.  The FSU and its successor states received only GSM-102
exports. 

Note 2:  Numbers may not add due to rounding. 

\a FSU/successors as a percent of GSM-102 and GSM-103 world exports. 
Percent calculations by GAO. 

\b Totals for exports to FSU/successors differ from previously
discussed credit guarantees made available, since there is a lag
between the two. 

Sources:  USDA's FAS and ERS. 


   USDA ASSESSMENTS
   OF FSU AND
   SUCCESSOR STATES'
   CREDITWORTHINESS AND IMPACT ON
   DECISIONS ABOUT WHETHER TO
   PROVIDE CREDIT GUARANTEES
---------------------------------------------------------- Chapter 2:4

We examined USDA documents recording the results of meetings of
USDA's Reconciliation Committee on whether to provide credit
guarantees to the FSU and its successor states.  We found that FSU
and, subsequently, Russian and Ukrainian creditworthiness were
assessed as very risky by the committee during the 2-year period when
USDA's CCC made available more than $5 billion in credit guarantees
to these countries.  We also found that there was considerable
disagreement between those participants whose primary concern was to
assess financial risk and those responsible for assessing market
opportunities.  The committee sought to develop recommendations that
would reconcile or balance the financial risks and market development
opportunities. 

The Assistant General Sales Manager or the Acting General Sales
Manager chaired the committee.  Other participants included
representatives from several offices under USDA's Under Secretary for
International Affairs and Commodity Programs.  These included (1) the
Financial Management Division of the Agricultural Stabilization and
Conservation Service (ASCS); (2) the CCC Operations Division (CCCD);
(3) the Commodity and Marketing Programs (C&MP), including its Grain
and Feeds Division (G&FD); (4) the Program Development Division
(PDD); and (5) the Trade and Economic Information Division. 


      AUGUST-DECEMBER 1990
-------------------------------------------------------- Chapter 2:4.1

The Reconciliation Committee met on August 21, 1990, to consider a
recommendation to provide GSM-102 export credit guarantees to the
FSU.  Members presented very strong arguments for both a $2-billion
program based on market development opportunities and a limited
$500-million (or less) program based on financial and political
risks.  The Reconciliation Committee Chairman suggested a $1-billion
program as a good balance between market development and risk. 
However, given strongly opposing views, the committee decided to
further assess the situation. 

The committee met again on September 19, 1990.  TEID, responsible for
assessing country risk, reported that there was continued
deterioration in the Soviet economic situation and a further
unraveling of the political situation.  It recommended a maximum
exposure of no more than $500 million in credit guarantees for the
Soviet Union.  ASCS, responsible for establishing limits on the
amount of credit guarantees that could be handled by Soviet banks,
said that on the basis of bank financial risks, macroeconomic issues,
and political problems, it was strongly against a GSM program higher
than $280 million.  It noted a rapid and major decline in Soviet
creditworthiness, reports of military movements outside of Moscow,
and open discussion of a coup in the Soviet Union.  Both TEID and
ASCS cited a plan being circulated in the Soviet Union for changing
the balance of power between central authorities and the republics,
and they expressed concern about who would be responsible for
repayment if republics split from the Soviet Union.  ASCS said that
if the Soviet plan were implemented, the Soviet banking system would
be decentralized and that VEB, the only Soviet bank authorized to
issue letters of credit to obtain credit guarantees, might not have
sufficient hard currency to repay its obligations. 

CCCD asked whether the committee could even consider anything over
$500 million, given the negative financial information presented by
TEID and ASCS.  The Reconciliation Committee Chairman agreed that
based on financial information only a smaller program was warranted. 
However, he reminded the participants that the purpose of the
committee was not only to consider financial risks but also to
reconcile these risks with market development opportunities.  He said
the committee had the responsibility of sending forward a
recommendation that was balanced between risks and market
development. 

C&MP, which had urged at least a $2-billion program for the Soviet
Union in August 1990, again urged a large program to meet many
potential market development opportunities.  It said (1) the Soviet
Union represented the largest market development opportunity in the
world and also had the greatest future potential, (2) there were many
competitors lined up to extend credit to the Soviets, (3) any loss in
U.S.  market share would be severely detrimental to U.S. 
agricultural business and producers, and (4) loss of the Soviet
market would result in higher domestic program costs for CCC now and
in future years.  In addition, C&MP said the Soviet Union's ability
to pay should not be based solely on current market information.  It
noted that the country had the largest untapped resource base in the
world and that even though its financial condition was bad, it was
still paying its agricultural debts to the United States. 

In spite of the wide differences of view, the committee recommended a
$1.25-billion program for the Soviet Union--subject to certain
conditions, such as releasing the guarantees in segments and securing
a credit guarantee assurance letter from the Soviet federal
government.\19 In addition, the committee said it wanted reviewers of
its recommendation to know that there was extreme risk in its
proposal and a substantial chance that CCC would have to make
outlays.  The committee said it felt that CCC should accept a degree
of country risk that it would refuse for another country because (1)
the Soviet Union was our largest export market for grains, and the
health of the American farm community was directly dependent on
maintaining market share in that market; and (2) in the event of a
loss of the Soviet market, CCC would also make substantial outlays
under domestic programs. 

According to documents provided to us by USDA, the Reconciliation
Committee did not meet again to discuss the Soviet situation between
the time of its September recommendation and December 12, 1990.  On
the latter date, the Secretary of Agriculture announced that the
President had waived the Jackson-Vanik amendment to the 1974 Trade
Act emigration requirements in order for the Soviet Union to purchase
U.S.  agriculture commodities using USDA credit guarantees.  The
Secretary said $1 billion in guarantees would be made available to
fulfill a request made by the Soviet government. 


--------------------
\19 A credit guarantee assurance letter makes the government of the
buying country financially responsible for letters of credit issued
by banks in that country to obtain credit guarantees.  Thus, if a
bank issuing letters of credit should default on the associated
credit guarantee loan payments, the government of the buying country
is legally responsible for reimbursing the U.S.  government for
payments the latter must make to the U.S.  lending bank(s) to cover
payment defaults. 


      MAY-JUNE 1991
-------------------------------------------------------- Chapter 2:4.2

In May 1991 the Reconciliation Committee met twice to consider a
Soviet request for an additional $1.5 billion in credit guarantees. 
In a May 2 meeting, TEID advised the members that the Soviet economic
and political situation was rapidly deteriorating and questioned who
would repay Soviet loans if the Soviet Union did not survive.  TEID
said that on the basis of a "best-case" scenario, it could propose no
more than $300 million in added credit guarantees.  PDD said it
favored postponing any further credits.  Among some of the reasons it
offered were that (1) section 202 (f) of the 1990 Farm Bill
stipulated that credit should not be extended to countries that
cannot adequately service the debt, (2) CCC exposure was already over
CCC's guideline, (3) Soviet instability seemed likely to continue,
(4) foreign exchange reserves would likely decline, and (5) there was
uncertainty about implementation of the Jackson-Vanik amendment. 
ASCS recommended no new credits. 

In contrast, C&MP told the committee that the Soviets could use all
of the $1.5 billion in credit guarantees and that if the United
States did not extend credit, it would be out of the market.  C&MP
warned that the U.S.  reputation as a reliable supplier would suffer,
and long-term trade repercussions would follow.  G&FD questioned
whether there was not room to work out a solution.  It noted that the
Soviet Union had huge resources and there had been no occasion of its
delaying payment.  G&FD warned that the President and the Secretary
of Agriculture might be embarrassed if guarantees were not extended,
since the Soviet state had an obligation to feed its people and the
credit guarantees would be used to purchase grain, a fundamental
staple.  The meeting ended with the committee recommending that no
further credit be extended to the Soviet Union for the time being. 
However, it said a reexamination should be initiated if, for example,
Congress acted to clarify the interpretation of section 202(f) of the
1990 Farm Bill.  As previously discussed, during May 1991 the Senate
approved a nonbinding resolution, and 37 members of the House sent
the Secretary of Agriculture a letter indicating that USDA should
assess the impact on U.S.  commodity exports if additional credit
guarantees were not extended to the Soviet Union. 

On May 28, 1991, the Reconciliation Committee met to review its
previous position and to be briefed by the Chairman and the General
Sales Manager on the results of a presidential mission that had
visited the Soviet Union between May 17 and 26, 1991, and of which
the Chairman and the manager were members.  The Chairman reported
there were no real signs of hunger or food shortages in the Soviet
Union.  The General Sales Manager told the committee that Soviet
officials had advised USDA that they could not provide firm financial
figures relative to Soviet creditworthiness.  As a result, he said,
Soviet figures had lost their credibility, and a Soviet request for
additional credits would have to be viewed as a political rather than
commercial request.  TEID agreed.  Although the committee noted that
the Soviet Union had passed a new immigration law that would make the
Jackson-Vanik requirement less of a problem in the future, the
committee concluded that there was no basis for changing its previous
recommendation not to extend further credit guarantees to the Soviet
Union. 

The committee's recommendation notwithstanding, on June 11, 1991, the
President announced his decision to extend another $1.5 billion in
loan guarantees to the Soviet Union.  According to the White House
Press Secretary, the President's assessment of the Soviet Union's
creditworthiness was based on the following:  (1) its record of never
defaulting on an official loan involving the United States; (2) its
positive repayment history on several hundred million dollars in
loans through the 1970s, primarily from the U.S.  Export-Import Bank;
(3) the judgment of the USDA team that had visited the Soviet Union
in May; (4) the subsequent review by the Secretary of Agriculture;
(5) the administration's discussions with Soviet officials; and (6)
the commitment of President Gorbachev to move toward a market
economy. 

In July 1991, the Assistant General Sales Manager told us that food
was a priority item for the Soviet government, since without adequate
food supplies political stability could be threatened.  The
government had an incentive to stay current on GSM debt payments, he
said, because Soviet officials knew that if the government did not
remain current, the GSM-102 program would be suspended. 


      AUGUST-OCTOBER 1992
-------------------------------------------------------- Chapter 2:4.3

The Reconciliation Committee met on August 12, 1992, to discuss a
possible fiscal year 1993 GSM-102 program for Russia.  PDD
recommended a $1.2-billion program.  It noted that Russia had not
missed a payment on any of the FSU's GSM-102 debt and that VEB and
Russian officials had continually said Russia would honor all of its
GSM-102 obligations.  C&MP said Russia's commodity import needs
greatly exceeded the $1.2-billion recommendation and that GSM-102 was
essential to maintain the U.S.  share of the Russian market.  It
warned that U.S.  exports to Russia would be needed to help offset
U.S.  farm program costs. 

TEID objected to the proposed $1.2-billion program.  It advised the
committee that CCC was vastly overexposed and at substantial risk of
realizing large losses on the FSU and Russian programs.  TEID said
that Russia's ability and commitment to resume full debt servicing in
fiscal year 1993 were very doubtful and that FSU debt was likely to
be rescheduled following Russian negotiation of a standby agreement
with the IMF.\20 TEID said it was impossible to establish a
meaningful debt exposure guideline for additional credits, since
Russia was not creditworthy for the size of its existing program. 
TEID recommended that Russia be extended other assistance of a more
concessional nature.  ASCS also objected to the proposed program
level due to the substantial credit risk.  It noted that the debt
exposure level for VEB was well over the established bank limit now
set by ASCS at $130 million, that VEB continued to fall behind on its
interest payments to other creditors, and that VEB had been late on a
number of GSM debt payments to banks.  In addition, responsibility
for the FSU debt on the part of each former republic had yet to be
settled. 

In the absence of a committee consensus, on August 28, 1992, the
Committee Chairman recommended a $1.2-billion Russian program to the
Acting Under Secretary for International Affairs and Commodity
Programs.  The Chairman detailed the differing views of the committee
members.  He noted that the proposed program might slightly reduce
CCC's total exposure and indicated that if there were no fiscal year
1993 program for Russia, there would be a highly damaging impact on
farm prices and resulting outlays under U.S.  domestic commodity
support programs. 

On August 26, 1992, the Reconciliation Committee met to discuss a
fiscal year 1993 GSM-102 program for Ukraine.  PDD recognized
continued deterioration of the Ukrainian economy but recommended a
$200-million program.  It said GSM-102 financing would be needed to
maintain U.S.  market share and that Ukraine officials had stated
they would honor all of their GSM-102 obligations.  C&MP estimated
Ukraine's credit needs as closer to $300 million and said that the
market would provide significant U.S.  sales opportunities well into
the latter half of the 1990s.  In contrast, TEID recommended against
a fiscal year 1993 program.  It found Ukraine overexposed based on
its fiscal year 1992 program and its share of repayments of the FSU
program.  It warned that unless Ukraine's record significantly
improved, TEID believed Ukraine would not obtain sufficient
international financing and foreign exchange earnings to pay for its
imports and service its foreign debts.  ASCS, which had established a
bank limit of $0 for the State Export-Import Bank of Ukraine, also
recommended against any further CCC credits. 

In the absence of a committee consensus, in September 1992 the
Chairman recommended a $150-million Ukrainian program to the Acting
Under Secretary.  The Chairman said he was again trying to balance
financial risk against market development opportunities.  He said
providing credits would mark the first time that USDA had made credit
guarantees available to a country whose current risk rating was below
grade (i.e., not creditworthy), but he also said the proposed program
would represent a minimal presence in a major market where the United
States had a strong interest. 

On September 14, 1992, USDA announced that during fiscal year 1993 it
would provide Russia with $900 million in GSM-102 credit guarantees
and $250 million in food aid.  On October 19, 1992, USDA announced an
allocation of $200 million in export credit guarantees to Ukraine for
fiscal year 1993. 


--------------------
\20 See chapter 5 for a discussion of IMF financial arrangements,
including standby agreements, programs, and loans. 


   RELATIONSHIP BETWEEN
   CREDIT-GUARANTEED FOOD IMPORTS
   AND AGRICULTURAL REFORM
---------------------------------------------------------- Chapter 2:5

As we have previously reported,\21 the progress of agricultural
reform in the successor states might be hindered by the provision of
export credit guarantees by the United States and other countries. 
Credit guarantees allow the successor states to continue to import
billions of dollars of foreign grain and other food commodities. 
Because these commodities are generally purchased, processed, and
distributed by state-owned enterprises, these structures are likely
to survive longer as state monopolies than might otherwise be the
case, although we were unable to quantify this effect.  It is these
inefficient state enterprises that successor state reformers seek to
privatize or replace with alternative, nonstate structures, such as
commodity exchanges and private food processors, distributors, and
wholesalers.  In addition, credit guarantee-assisted food imports
might hinder domestic food production and the efficient processing
and marketing of this food by keeping down prices offered to
successor state farmers and food processors and distributors. 

At the same time, however, a number of successor state officials we
contacted felt that credit guarantee-assisted food imports had
benefited the overall economic reform process in the states more
generally.  According to these officials, the food imports helped to
preclude food shortages and thereby contributed to the political and
social stability needed to advance the overall economic reform
process. 

In commenting on a draft of this report, USDA indicated that
credit-guaranteed assistance has adversely affected reform in the
FSU.  According to USDA, although widespread dislocation in the food
supply never occurred, the West continued to provide assistance
(credits and food aid) to the FSU, which accepted it to the likely
detriment of economic reforms (increased debt and continued state
control of agricultural marketing that lowers productivity, increases
waste, and possibly undercuts domestic production).  According to
USDA, FSU leaders figured it was in their best interest to accept
western assistance since repayment, if any, would be delayed.  USDA
also noted that before its breakup, the Soviet Union also imported
large amounts of grain rather than pay farmers more to increase
domestic grain procurement and to reduce waste. 


--------------------
\21 GAO/GGD-94-17. 


   EXPOSURE OF THE GSM PROGRAMS TO
   DEFAULT ON FORMER SOVIET
   UNION/SUCCESSOR STATES' DEBT
---------------------------------------------------------- Chapter 2:6

In the space of 2 years, the GSM-102 program quickly became heavily
exposed to debt of the FSU and its successor states.  As table 1.1
showed, in fiscal year 1990 there were no GSM sales to the FSU.  In
fiscal year 1991, GSM guaranteed sales to the FSU were $1.9 billion,
which equalled 38 percent of all GSM-102 sales that year.  In fiscal
year 1992, the FSU, Russia, and Ukraine together accounted for $2.6
billion, or 43 percent of all GSM-102 guaranteed sales.\22 Not
surprisingly, the FSU and its successor states accounted for the
single largest portion of all outstanding loan guarantees from the
GSM-102/103 programs combined.  As of the end of January 1993, CCC
had $8.8 billion in outstanding loan guarantees (principal only) from
these programs.\23 Of this amount, $3.6 billion, or 40.9 percent, was
accounted for by guarantees provided to the FSU, Russia, and Ukraine. 
When the outstanding principal owed by GSM recipient countries is
weighted by the risk of countries defaulting on their debt payments,
we estimate that the exposure to default by the FSU, Russia, and
Ukraine is even greater.  See table 5.12 and accompanying discussion
in chapter 5.\24

Table 2.5 provides the repayment schedule for the FSU's GSM-102 loans
as of the end of February 1993. 



                                    Table 2.5
                     
                         GSM-102 Schedule of Payments and
                        Defaults for the FSU, Russia, and
                         Ukraine, as of February 28, 1993

                              (Dollars in millions)


                                  Defaul          Defaul                  Defaul
Time Period                  P+I      ts     P+I      ts     P+I     P+I      ts
------------------------  ------  ------  ------  ------  ------  ------  ------
================================================================================
1991                       $38.3      $0      $0      $0      $0   $38.3      $0
================================================================================
1992                       991.8   141.4     5.7     4.1     1.1   998.6   145.5
1st quarter                279.8       0       0       0       0   279.8       0
2nd quarter                123.5       0       0       0       0   123.5       0
3rd quarter                233.5       0       0       0       0   233.5       0
4th quarter                355.2   141.4     5.7     4.1     1.1   362.0   145.5
 1993               1,314.   196.7   270.1     4.6    65.4  1,649.   201.3
                               3                                       8
1st quarter\c              537.1   196.8     4.6     4.6     1.1   542.8   201.4
2nd quarter                229.2       -    69.4       -    19.1   317.7       -
3rd quarter                212.2       -   111.3       -    18.3   341.8       -
4th quarter                335.7       -    85.0       -    26.8   447.5       -
================================================================================
1994                      1,287.       -   270.6       -    62.9  1,620.       -
                               0                                       5
1st quarter                536.5       -     7.8       -     0.7   545.0       -
2nd quarter                223.1       -    66.2       -    18.3   307.6       -
3rd quarter                201.1       -   118.5       -    18.0   337.6       -
4th quarter                326.4       -    78.2       -    25.9   430.5       -
 1995                 396.7       -   260.3       -    60.4   717.4       -
1st half                   393.4       -    68.8       -    17.7   479.9       -
2nd half                     3.4       -   191.5       -    42.7   237.6       -
================================================================================
1996                           0       -     4.2       -       0     4.2       -
================================================================================
Grand Total               $4,028  $338.1  $810.9    $8.7  $189.9  $5,029  $346.8
                              .2                                      .0
--------------------------------------------------------------------------------
Legend:  P + I = principal and interest payments.
 = not applicable. 

Note 1:  Numbers may not add to totals due to rounding. 

Note 2:  Schedule does not reflect debt reschedulings of September
1993 and June 1994. 

\a Ukraine had not defaulted on its GSM-102 payments. 

\b Totals calculated by GAO from the country row data. 

\c Through February 28, 1993. 

Source:  Commodity Credit Corporation. 

As the table shows, combined principal and interest payments due from
the FSU, Russia, and Ukraine for 1993 equaled nearly $1.65 billion;
in 1994, $1.62 billion; and in 1995, about $0.72 billion.  The
figures do not reflect, as discussed below, USDA's April 1993 and
June 1994 agreements to reschedule a considerable amount of FSU
GSM-102 debt. 

Since Russia is the only successor state making payments on GSM-102
debt for the FSU and since Russia accounts for nearly all credit
guarantees committed since the program was converted to a bilateral
mode, the GSM program is particularly vulnerable if Russia is not
able or willing to make payments on GSM debt.  As table 2.5 shows,
Russia began defaulting on scheduled payments for both the FSU and
Russia itself beginning in the fourth quarter of 1992.  As a result
of these defaults, USDA suspended Russia's participation in the
GSM-102 program.  By March 31, 1993, FSU and Russian defaults totaled
nearly $648 million (see table 2.6). 



                                    Table 2.6
                     
                      Status of Defaults on FSU and Russian
                     GSM-102 Credit-Guaranteeed Loans and CCC
                        Payouts on U.S. Bank Claims, as of
                                September 30, 1993

                              (Dollars in millions)


Defaults
and         As of 3/    As of 6/    As of 9/    As of 3/    As of 6/    As of 9/
Claims         31/93       30/93       30/93       31/93       30/93       30/93
--------  ----------  ----------  ----------  ----------  ----------  ----------
Net           $645.1      $897.9    $1,117.1        $2.6        $7.8       $10.5
 defaults
 reporte
 d by
 banks
 to CCC
Gross          517.8       771.6     1,117.0         0.3         4.0        25.2
 claims
 by
 banks
 submitt
 ed to
 CCC
Claims             0           0           0           2           2         1.8
 withdra
 wn
 because
 recover
 ed
Gross          263.8       557.0     1,093.3         0.1         3.7        22.9
 claims
 paid by
 CCC
Claims           0.2         0.2         0.2         0.1         0.1        12.6
 recover
 ed by
 CCC
 from
 default
 er
Claims        $263.6      $556.8    $1,093.1          $0        $3.6       $10.3
 paid by
 CCC and
 not
 recover
 ed
--------------------------------------------------------------------------------
Note:  The status of defaults was calculated prior to the conclusion
of a debt rescheduling agreement on that day. 

Source:  Commodity Credit Corporation. 

On April 2, 1993, the United States reached a provisional agreement
with Russia to reschedule approximately $1.1 billion of GSM-102
debt.\25 The agreement covered FSU principal and interest arrears, as
well as payments coming due in calendar year 1993, on export
contracts made in 1991.  The rescheduled debt would be repaid over 7
years, with a 2-year grace period on principal repayments.  Not
covered by the rescheduling were $287 million in FSU arrears
accumulated through March 31, 1993.  Under the proposed agreement,
Russia was to eliminate the arrears by June 30, 1993, and stay
current on GSM-102 payments as they came due.  However, rather than
eliminating the arrears, Russian defaults increased.  By the end of
September 1993, net defaults totaled nearly $1.13 billion, and the
Commodity Credit Corporation had paid out $1.1 billion in net claims
to U.S.  banks that had made the loans (see table 2.6.). 

Nonetheless, on September 30, 1993, the United States and Russia
concluded a debt rescheduling agreement along the lines of the April
proposal.  Under the agreement, Russia accepted responsibility for
all of the GSM-102 debt of the FSU.  The agreement provided for
rescheduling an estimated $1.07 billion of GSM-102 debt, including a
considerable amount of the arrears.  In addition, Russia agreed to
repay approximately $444 million in unrescheduled arrears in three
installments by the end of 1993.  Table 2.7 shows the schedule for
Russia's repayment of FSU and Russian GSM-102 debt following the
September 1993 debt rescheduling.  As the table shows, the debt was
to be fully repaid by the year 2000.  In addition, Russia was
required to continue to make payments, as they come due, for FSU and
Russian GSM-102 export contracts made after 1991.  According to USDA,
a determination on resumption of the GSM-102 program for Russia could
not be made until the debt issues were fully resolved and all arrears
were eliminated. 



                               Table 2.7
                
                 Total Principal and Interest Payments
                 Due from Russia to U.S. Banks and the
                 U.S. Government on the FSU and Russian
                GSM-102 Programs, as of October 1, 1993

                         (Dollars in millions)

                                               Estimated         Total
                                   Principal    interest   principal &
Year payments due                   payments  payments\a      interest
--------------------------------  ----------  ----------  ------------
1993                                      84          23           107
1994                                  $1,560        $124        $1,684
1995                                    $753         $76          $829
1996                                     289          53           342
1997                                     206          39           245
1998                                     206          28           234
1999                                     206          18           224
2000                                     179           7           186
======================================================================
Total                                 $3,483        $368        $3,851
----------------------------------------------------------------------
Note 1:  Payment includes rescheduled debt as agreed to in the
September 30, 1993, debt-rescheduling agreement between the United
States and Russia.  It does not include unrescheduled arrears of $444
million that were repaid by December 31, 1993. 

Note 2:  Schedule does not reflect debt rescheduling agreement of
June 1994. 

\a Interest amounts due were estimated.  U.S.  banks usually adjust
the rate every 6 months based on rates in effect at the time of the
adjustment. 

Source:  USDA's ASCS. 

Russia did pay the arrears by the end of 1993.  However, during early
1994, Russia again fell into default on GSM-102 debt.  For example,
during the first 70 days of 1994, Russia was in default about 51
days.  In February, USDA agreed to reschedule $344 million in 1991
payments coming due during the January 1 through April 30, 1994, time
period.  On June 4, 1994, USDA agreed to reschedule another $517
million in payments due during the May 1 through December 31, 1994,
period, as well as $22 million in deferred interest.  Repayment terms
for the principal included a 2.75-year grace period followed by an
8-year repayment period.  The deferred interest on the rescheduling
agreement is to be repaid over a 5-year period.  Russia was still
required to pay approximately $360 million owed to CCC and U.S. 
banks for the January through December 1994 period. 

The amount of GSM-102 principal outstanding for Russia subsequent to
the June 4 rescheduling agreement was $2.85 billion.  This figure
included principal amounts, interest, and capitalized interest due
under the FSU program and the Russian program.  At the time of the
June rescheduling Russia was in arrears, and the rescheduling enabled
Russia to become current on those arrears.  The rescheduling occurred
as part of a broader agreement concluded in Paris between Russia and
its official creditors.  The creditor countries also agreed to meet
with Russia later in 1994 to discuss a longer term and more
comprehensive rescheduling to address Russia's severe financial
problems. 

Meanwhile, on June 2, 1994, Ukraine began defaulting on its GSM loan
payments.  As of August 17, 1994, its defaults totaled about $31.1
million and CCC had paid $21.6 million for claims made by lenders. 


--------------------
\22 The country with the next largest change in the program during
this period was Iraq.  It accounted for 11 percent of GSM-102 exports
in fiscal year 1990 and no sales in fiscal year 1991 and fiscal year
1992. 

\23 These figures do not include any payments in default or claims
paid by CCC.  As of June 30, 1992, CCC had $9.04 billion outstanding
in GSM-102/103 guarantees on loan principal for all GSM recipient
countries and $4.51 billion in accounts receivable resulting from
guarantee payouts on previously delinquent GSM-guaranteed loans. 

\24 The discussion in chapter 5 focuses only on the GSM-102 program. 

\25 The GSM-102 debt rescheduling was part of a broader agreement
concluded between 19 creditor nations and Russia (see ch.  3 for
additional discussion). 


   IMPACT OF U.S.  GSM-102 EXPORTS
   TO THE FSU ON U.S.  COMMODITY
   SUPPORT PROGRAMS AND U.S. 
   FARMERS
---------------------------------------------------------- Chapter 2:7

According to USDA, providing export credit guarantees to banks
willing to extend loans to foreign purchasers of U.S.  agricultural
commodities increases the demand for U.S.  exports.  This increase,
in turn, results in higher commodity prices for U.S.  farmers and
lower costs for U.S.  government commodity support programs.\26
Proponents of the GSM-102 credit guarantees point out that these
reduced program costs offset the risk of default on the guaranteed
debt.\27 We reviewed USDA estimates of the cost savings associated
with the extension of export credit guarantees to the FSU and its
successor states in fiscal years 1991 and 1992.  The FSU and its
successor states received GSM-102 export credit guarantees for the
purchase of U.S commodities and freight, and they also secured lower
prices for certain commodities as a result of USDA Export Enhancement
Program (EEP) bonus payments to U.S.  exporters.\28

USDA initially provided us with two estimates of savings in commodity
support programs associated with extending GSM-102 export credit
guarantees to the FSU.  The first estimate, which was made in
conjunction with a proposed GSM-102 package in the spring of 1991,
indicated that if CCC did not provide $1.5 billion in additional
export credit guarantees to the FSU between January and July 1, 1991
($1 billion in guarantees had already been extended between January
and March 1991), CCC domestic support payments for wheat, corn, and
soybeans could increase between $360 million and $755 million.  The
higher estimate was arrived at by assuming 100-percent program
additionality--that is, that alternative export markets would not
exist for GSM-102 guaranteed exports to the FSU.  Thus, commodities
not sold to the FSU would have to be sold in the U.S.  market or
added to unsold carryover stocks.  For the lower estimate, USDA made
two different key assumptions.  The first assumption was that 25
percent of the commodities could be exported to other countries.\29
The second assumption was that $100 million of the guarantees for the
FSU would be used for high-value products\30

for which USDA does not provide deficiency payments or nonrecourse
loans.  Therefore, this $100 million in GSM-102 guarantees would have
no impact on the costs of USDA's domestic commodity support programs. 
Both of USDA's estimates deducted the expected cost of EEP bonus
payments provided for wheat exports under the proposed GSM sales. 

USDA's second estimate, made in February 1993, assessed changes in
support costs for commodity programs if the United States did not
export a projected 6 million tons of corn and 6 million tons of wheat
to the FSU during 1993 and 1994.  According to this estimate, support
payments for corn would increase by $499 million and wheat payments
by $685 million.  Soybean costs were not included in the estimate. 
The estimate assumed that none of the corn and wheat would be sold
into alternative export markets (i.e., 100-percent program
additionality).  Expected EEP bonus payments, however, were not
netted out. 

The USDA estimates of increased commodity support costs depend
importantly on the assumption that alternative markets would not be
generally available if the commodities were not exported to the FSU. 
USDA did not give us the basis for this assumption.  If the
commodities in question were exported to other nations, USDA's
estimates of farm price changes and program savings would be less
than it estimated. 


--------------------
\26 U.S.  producers of certain commodities receive assistance through
deficiency payments, nonrecourse loans, and marketing loans. 
Deficiency payments are direct payments to producers of certain
commodities equal to the difference between the target price and the
actual market price of each of those commodities.  The target price
is the minimum price determined by U.S.  law to provide an economic
safety net for farmers.  The deficiency payments for corn and wheat
for the 1990 crop year were estimated by USDA at approximately $3
billion and $2.4 billion, respectively.  The deficiency payments for
the 1991 crop year for corn and wheat were approximately $2 billion
and $2.2 billion, respectively.  A nonrecourse loan is a CCC loan
made to a farmer using a quantity of the commodity produced as
collateral at a set price referred to as the "loan rate." The farmer
may elect to repay the loan plus accrued interest within a specified
period of time, or default on the loan, in which case the ownership
of the commodity passes to CCC, thereby fully satisfying the loan
obligation.  The latter action is taken if the market price is at or
below the loan rate.  For the market prices of wheat and feedgrains,
nonrecourse loans provide a minimum price for the commodity. 
Marketing loans allow farmers who grow rice, cotton, and oilseeds to
repay these nonrecourse loans at an adjusted market price rather than
at the loan rate. 

\27 For example, when the White House announced on November 20, 1991,
that the United States would provide $1.25 billion in GSM-102 credit
guarantees to the FSU, the announcement said that the sales would
provide an important boost to the U.S.  food and agricultural
community.  The announcement also stated that substantial budget
savings would result from significantly lower deficiency payments. 

\28 Under EEP, USDA provides cash payments as bonuses to U.S. 
exporters to help lower the export prices of certain U.S. 
agricultural commodities and make them competitive with subsidized
foreign agricultural exports. 

\29 In this case, program additionality is 75 percent. 

\30 High-value products represent a diverse range of agricultural
goods.  They include unprocessed fruits and vegetables that employ
low-skilled labor and are not technology-intensive but require
specialized packing and transportation.  They also include
semiprocessed grains and oilseeds that rely on semiskilled labor and
greater technology and capital inputs.  In addition, they include
highly processed products such as designer chocolates, prepared
meats, and distilled beverages. 


      QUESTIONS ABOUT AN
      ASSUMPTION OF 100-PERCENT
      PROGRAM ADDITIONALITY
-------------------------------------------------------- Chapter 2:7.1

For a variety of reasons, USDA's assumption about 100-percent
additionality is debatable:  (1) special features of the GSM-102
program that were made available to the FSU and its successor states
could have been attractive if offered to other importing nations; (2)
competitor exporting nations may have displaced U.S.  exports in
other markets; and (3) CCC program costs depend on commodity farm
prices that, in turn, are the result of many factors that influence
global supply and demand conditions. 

As previously noted, countries that participate in the GSM-102
program are able to obtain better interest rates on their credit than
would be the case in commercial markets, as they are in effect using
the repayment guarantee of the U.S.  government to obtain the credit. 
In addition, most of the guarantees to the FSU and its successor
states in fiscal year 1991 and fiscal year 1992 included coverage for
100 percent of the value of the commodities (rather than 98 percent,
which is typical for the GSM-102 program).  The 100-percent guarantee
should also lower borrowing costs to prospective buyers.  Also, the
GSM-102 program for the FSU and its successor states included
guarantees for freight costs.  In fiscal years 1991 and 1992, freight
coverage equaled nearly $443 million, or about 10 percent of the
value of all GSM-102 credit guarantees offered the FSU and its
successor states.  The coverage of freight costs meant that each
dollar of GSM-102 commitment to the FSU and its successor states
supported only 90 cents' worth of commodity exports.  Also, EEP bonus
payments to the importing countries for selected commodities lowered
the cost of importing these commodities, which in turn should have
resulted in additional exports.  Total EEP bonus payments for GSM-102
exports to the FSU and the successor states in 1991 and 1992 were
about $579 million. 

We estimated that the combination of freight cost financing and EEP
bonus payments alone made the additionality attributable to the GSM
program for the FSU and its successor states in fiscal years 1991 and
1992 equal at most to about 77 percent.\31 We believe that if USDA
had offered GSM-102 credit guarantees to other potential buyers with
similar generous terms, it is possible that the United States could
have found alternative export markets for at least some of the GSM
sales that were made to the FSU and its successor states. 

The behavior of competitor exporters is also relevant to the question
of program additionality.  For example, if exporters from other
nations responded to the GSM-102 guarantees that were made available
to the FSU and its successor states by offering similar incentives to
non-FSU importers, the exporters may have displaced potential U.S. 
exports to these other markets.  Displaced U.S.  exports would have
reduced additionality resulting from increased exports to the FSU and
its successor states.  Alternatively, if the United States did not
provide the guarantees to the FSU and its successor states but other
exporter nations did, global commodity prices would presumably be
about the same.  As a result, there would be little or no reduction
in USDA commodity support payments to farmers. 

Actual support cost is also affected by commodity prices.  Commodity
prices are the result of many factors that influence global supply of
and demand for commodities.  These include, among others, the overall
economic performance of the United States, as well as the global
economy; the weather and growing conditions for crops in the United
States and competitor nations; purchasing decisions in importing
countries; the prices of competing commodities; and the production
and consumption subsidies of the United States and its competitors. 
These factors could cause commodity prices to reach levels that would
reduce or eliminate the need for additional commodity support
payments to U.S.  farmers--even if the United States did not export
to the FSU and its successor states.  However, the complexity and
variety of factors that could influence commodity prices make the
isolation of the effect of a single factor difficult. 

Without explicit and detailed investigation of the behavior of
exporters and importers and specification of other macroeconomic and
microeconomic variables, discerning the additionality of the GSM-102
program is difficult.  In the absence of reliable data on the
additionality of GSM-102 exports, we believe that estimated savings
in commodity support programs associated with extending GSM-102
export credit guarantees to the FSU and its successor states should
consider a range of additionality levels. 


--------------------
\31 In our estimate, we used EEP bonus data for calendar years 1991
and 1992, since fiscal year data were not available. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:8

USDA provided more than $5 billion in export credit guarantees to the
FSU and its successor states in 1991-92.  It did so when its own
assessments indicated that these were high-risk countries from a
creditworthiness perspective.  According to documents of USDA's
Reconciliation Committee, which makes recommendations concerning
whether to provide credit guarantees to specific countries and, if
so, in what amounts, the committee saw a need to balance
debt-servicing considerations against the need to maintain and expand
overseas markets.  On two occasions when the committee was unable to
reach a consensus, the Chairman made recommendations that he believed
balanced financial risk and market development considerations.  Since
the 1990 Farm Bill does not specify criteria to be used in assessing
debt-servicing ability, USDA has considerable discretion and, thus,
can provide large amounts of credit guarantees to high-risk
countries, increasing the risk of defaults on GSM-102 loans. 

Between November 1992 and the end of September 1993, Russia defaulted
on more than $1.1 billion in GSM-102 loans made to the FSU and
Russia.  Under a September 30, 1993, agreement, the United States
agreed to reschedule about $1.1 billion in GSM-102 debt, provided
that Russia repaid $444 million of arrears (as of the end of 1993). 
Russia did repay the arrears on schedule.  However, in January 1994,
Russia again fell into default on GSM-102 loans.  Between February
and early June 1994, the United States agreed to reschedule
approximately $882 million in additional payments due to CCC and U.S. 
banks under the GSM-102 program.  Following the June 1994
rescheduling, there was approximately $2.9 billion in outstanding
GSM-102 principal still owed by Russia on GSM-102 credit-guaranteed
loans. 

According to USDA estimates, export credit guarantees provided to the
FSU and its successor states resulted in higher commodity prices and,
in turn, lower costs for U.S.  commodity support programs. 
Proponents of the credit guarantees assert that the reduced program
costs help offset the risk of default on guaranteed debt.  However,
the estimated savings in commodity support costs depended importantly
on an assumption that alternative markets would not be generally
available if the commodities were not exported to the FSU.  We
disagree with analyses that assume only 100-percent additionality,
and we believe that any estimated savings in commodity support
programs should consider a range of additionality levels. 


DEBT SITUATION OF THE FSU AND ITS
SUCCESSOR STATES
============================================================ Chapter 3

During the latter part of the 1980s, a serious debt situation arose
in the Soviet Union.  As the situation evolved, western commercial
lenders scaled back and then virtually halted lending to the Soviet
Union.  Western governments provided loans and credit guarantees to
help fill the gap.  By late 1991, the Soviet Union's debt problem had
reached crisis proportions.  At the same time, the country was in the
final stages of political disintegration.  The debt crisis was
temporarily eased in November 1991, when official western creditors
agreed to a 1-year deferral of principal payments on pre-1991 debt. 
Eight of the Soviet republics agreed to joint and several liability
for the outstanding debt of the Soviet Union and to carry out
economic reforms recommended by the IMF. 

Following the dissolution of the Soviet Union in December 1991, the
former republics sought membership in the IMF and the World Bank. 
The Group of Seven (G-7) nations\1 concluded that the international
financial institutions could be used to promote economic reform in
the FSU and to coordinate western financial assistance.  They
encouraged the new states to undertake substantial economic reforms
designed to stabilize their economies.  Doing so could lead to
substantial new financial assistance from abroad and help the new
states to improve their creditworthiness.  Specifically, the G-7
nations said they would support a $24-billion financial assistance
package for Russia, contingent on Russian progress in stabilizing and
reforming its economy.  However, Russia did not stabilize its
economy, and the FSU debt arrears situation worsened.  In April 1993,
Russia's official creditors (i.e., creditor country governments)
found it necessary to reschedule a significant amount of Russian and
FSU debts due in 1993.  At the same time, the G-7 promised a new
package of economic support for Russia.  However, debt relief and
other financial assistance have remained largely contingent on
economic stabilization and reform.  During the first half of 1994,
Russia's official creditors rescheduled additional FSU debt and
agreed to meet later in the year to consider longer and more
comprehensive rescheduling. 


--------------------
\1 Includes Canada, France, Germany, Italy, Japan, the United
Kingdom, and the United States. 


   HOW DEBT BECAME A PROBLEM
---------------------------------------------------------- Chapter 3:1

For decades the Soviet Union was a conservative user of western
credits and was regarded by western government and commercial lenders
as an excellent credit risk, given its huge gold reserves and other
exportable raw materials.\2 During the first 9 years of the 1980s,
the Soviets usually ran hard currency current account surpluses.\3

In the mid- and late 1980s, political detente and increasingly lax
fiscal policies of the Soviet government led to a rapid increase in
commercial lending to the Soviet Union, according to the World Bank. 
It estimates that the Soviet Union's gross hard currency debt more
than doubled, from $38.3 billion at the end of 1987 to $81.5 billion
at mid-1993 (see table 3.1).\4



                                    Table 3.1
                     
                     Total External Debt and Debt Service of
                          the FSU/Russia, 1986-Mid-1993

                              (Dollars in billions)

                                                                            Mid-
Debt components           1986   1987   1988   1989   1990   1991   1992    1993
-----------------------  -----  -----  -----  -----  -----  -----  -----  ------
Total debt               $30.7  $38.3  $42.2  $53.8  $59.3  $67.1  $78.7   $81.5
Medium-& long-term        23.3   29.7   31.0   35.6   47.5   54.3   65.7    69.8
Short-term                 7.4    8.6   11.2   18.2   11.8   12.8   13.0    11.7
Total debt accounted      15.9   13.7   10.2   11.1   15.1   25.3   22.4      \b
 for by export
 credits\a
Total debt service         7.8    8.8    8.4    9.4   22.9   17.0   12.8      \b
Principal due              5.4    6.2    5.4    5.7   18.2   12.8    8.9      \b
Interest due               2.4    2.6    3.0    3.7    4.7    4.2    3.9      \b
Arrears\c                    0      0      0    0.5    4.5    4.8   11.8     8.0
--------------------------------------------------------------------------------
Note:  The table assumes 100 percent reallocation of FSU debt to
Russia.  Mid-1993 data are for June 30 and may be subject to
revision. 

\a Of total short-term, medium-term, and long-term debt, export
credits accounted for amounts shown. 

\b Not available. 

\c Arrears occurred when principal or interest payments were not
fully met. 

Sources:  World Debt Tables 1992-93 and 1993-94, World Bank
(Washington, D.C.:  Dec.  1992 and Dec.  1993). 

In 1989, the Soviet Union experienced a negative hard currency trade
balance of $2.4 billion due to surging imports.\5 The imbalance was
financed by hard currency borrowing.  During 1989 and 1990, a growing
debt burden, debt-servicing problems, and increasing world concern
about a collapsing Soviet economy and political disintegration began
to affect the country's access to the commercial financial market.\6
According to the World Bank, the surge of imports caused a severe
liquidity crisis, leading to a buildup of arrears to western banks
and suppliers.  The liquidity crunch was exacerbated, in part,
because the government had extended authority to Soviet enterprises
to negotiate overseas business.\7

According to a World Bank analysis, the Soviet Union was $4.5 billion
in arrears at the end of 1990 (see table 3.1).  In an earlier
analysis, the bank estimated that about 10 percent of year-end 1990
arrears was guaranteed debt to official creditors, 30 percent
unguaranteed debt to commercial banks, and 60 percent debt to others
(mainly suppliers).\8 As arrears accumulated, commercial banks
reduced and then stopped new lending.  The Soviet Union was faced
with large net repayment obligations, which it financed to a great
extent out of its deposits in western banks.  As a result, these
liquid reserves fell sharply, from $14.6 billion in December 1989, to
$8.6 billion in December 1990, and to $6.4 billion by March 1991.  At
the end of 1991, estimated reserves were only about $5.1 billion,
which represented less than 2.5 months' coverage of import costs. 
According to one source, a 3- to 6-month coverage is generally
considered adequate.\9

Gold reserves, the other major component of the FSU's international
reserves, were apparently either drawn down to very low levels or
already at low levels.  Thus, they were not available for financing
the liquidity problem.  According to 1991 Central Intelligence Agency
(CIA) estimates, Soviet gold reserves had ranged between 1,679 metric
tons in 1980 to 2,105 metric tons in 1990, with a peak level of 2,366
metric tons in 1985.\10

However, during the latter part of 1991 an economic adviser to the
Soviet President asserted that the Soviet government had been selling
off large amounts of gold reserves for several years.  He added that
only 240 tons of reserves were left (valued at less than $3 billion). 
In May 1992, the U.S.  Minister Counsellor for Economic Affairs at
the U.S.  embassy in Moscow told us that Russia had only 220 metric
tons of gold.  He said these amounts were minimal reserves.  In early
February 1993, a former Soviet prime minister said that the Soviet
Union had squandered its gold reserves before President Gorbachev
took over in 1985 but had managed to keep the matter secret until
1991.\11


--------------------
\2 William H.  Cooper, Russia and the Commonwealth of Independent
States:  Economic Conditions and Reforms, Library of Congress,
Congressional Research Service Issue Brief IB92003 (Washington, D.C.: 
Jan.  29, 1992). 

\3 In 1991, the Soviet Union had nominal claims on developing
countries estimated at about $143 billion.  According to the World
Bank, well over a quarter of these claims may have been in arrears. 
The bank estimated that only 25 percent of the debt service that fell
due in 1991 was paid.  The record for the first half of 1992 was
worse.  See World Debt Tables 1992-93, Vol.  I, World Bank
(Washington, D.C.:  Dec.  1992). 

\4 Estimates of the former Soviet Union's hard currency debt vary
considerably.  For example, on September 7, 1992, LDC Debt Report
cited estimates ranging between $54.7 billion (the Bank for
International Settlements) to $80 billion (Russian officials). 

\5 The Soviet Union had a negative hard currency trade balance of
$2.7 billion with the developed West in 1988, but this amount was
more than offset by positive balances with developing countries and
centrally planned economies.  In 1989, the negative balance with the
developed West grew to $5.2 billion. 

\6 By the second quarter of 1990, short-term credit lines had been
exhausted, and the Soviet Union was unable to pay $2 billion for
imports of foodstuffs and other consumer goods. 

\7 The decentralization of foreign trade made it possible for many
Soviet enterprises to make purchases they could not pay for in
foreign exchange.  When VEB refused to bail them out, a rapid buildup
of arrears began, in late 1989.  Subsequently, the Soviet government
recentralized foreign exchange transactions. 

\8 World Debt Tables 1991-92, the World Bank (Washington, D.C.:  Dec. 
1991).  In this study, the bank estimated year-end 1990 arrears at $4
billion. 

\9 See Patricia A.  Wertman, The International Reserve Position of
the Former Soviet Union:  Is the "Cupboard" Bare?  Library of
Congress, Congressional Research Service (Washington, D.C.:  Apr. 
10, 1992).  According to the author, between the end of 1985 and the
end of 1989, Soviet end-of-year bank claims were consistently in
excess of $13 billion.  The peak occurred at the end of 1988, when
Soviet claims on western banks amounted to $15.3 billion.  During
1990, Soviet short-term bank liabilities, i.e., bank debt with
maturities of less than a year, declined by $9.7 billion.  This
latter was considerably more than the Soviet reserve losses for 1990. 

\10 Other western analysts estimated Soviet gold reserves as ranging
between 1,500 and 3,000 metric tons.  See The International Reserve
Position of the Former Soviet Union. 

\11 Fred Hiatt, "Soviets Hid Gold Loss for Years," Washington Post
(Feb.  3, 1993). 


      STRUCTURE, COMPOSITION, AND
      MATURITY OF THE DEBT
-------------------------------------------------------- Chapter 3:1.1

Due to its problems with debt servicing, by 1990 the Soviet Union had
become a high-risk country for lenders.  The worsening political,
economic, and liquidity conditions virtually halted the flow of
commercial financing.  This halt in commercial financing became an
impetus for western governments to undertake considerable official
financing.  Consequently, the structure of Soviet debt was
substantially altered, as evidenced by changes in the source and
maturity of the Soviet debt. 

Whereas commercial banks and other private creditors had accounted
for 78 percent ($44.1 billion) of the Soviet Union's convertible
currency debt at the end of 1989, they held only 41 percent ($25
billion) at the end of 1991.  Conversely, Soviet official bilateral
debt increased from $12.4 billion, or 22 percent of convertible
currency debt, to $36.5 billion, or 59 percent, during the same
period.\12

A substantial change in the maturity of FSU debt accompanied the
change in the sources of FSU debt.  As commercial lenders increased
their efforts to collect on their short-term loans, western
governments extended medium- and long-term credit or credit
guarantees.  Whereas in 1988 about 27 percent of the debt was short
term, at mid-1992 short-term debt was estimated at only 17 percent. 

As table 3.2 shows, in mid-1991 Germany was by far the largest
creditor of the FSU, accounting for more than two-fifths of FSU
external debt.  However, much of the debt to Germany (about 40 to 43
percent at the end of March 1991) was owed to the former German
Democratic Republic (East Germany).  The United States was not among
the six biggest creditors. 



                               Table 3.2
                
                  Principal Creditors of the FSU, June
                                  1991

                         (Dollars in billions)

                                      Guaranteed  Nonguarantee
Country                                     debt        d debt   Total
------------------------------------  ----------  ------------  ------
Germany                                   $14.4-     $4.0-$7.5  $21.9\
                                           $17.9                     a
France                                       0.8           4.8     5.6
Japan                                         \b            \b     4.5
Italy                                        4.0           0.4     4.4
Austria                                      1.8           1.7     3.5
United Kingdom                               2.8           0.6     3.4
Others                                        \b            \b     7.9
======================================================================
Total                                         \b            \b  $51.2\
                                                                     c
----------------------------------------------------------------------
Note:  Countries are listed in descending order based on the total
value of their loans to the FSU. 

\a Equals the sum of $14.4 and $7.5 or $17.9 and $4.0. 

\b Not provided. 

\c Includes official or guaranteed debt and nonguaranteed debt to
commercial banks.  Excludes nonguaranteed debt to other lenders, such
as suppliers. 

Source:  World Bank. 

Table 3.3 provides information on both loans and grant assistance
pledged to the FSU by the G-7 nations and the European Community
during 1990 through 1992.  It shows that Germany pledged the largest
amounts of both loans and grants during this period--$54 billion out
of $81 billion.  The United States was second, with combined pledges
totaling about $9.2 billion. 



                               Table 3.3
                
                Pledged Assistance From the G-7 Nations
                 and the European Community to the FSU,
                                1990-92

                         (Dollars in millions)

                                        Loans\                  Percen
Donor                                        a  Grants   Total     t\b
--------------------------------------  ------  ------  ------  ------
Germany\c                               $42,00  $12,00  $54,00    66.7
                                             0       0       0
United States                           6,685\   2,552   9,237    11.4
                                             d
Italy                                    5,600      18   5,618     6.9
EC Commission                            2,363   1,702   4,065     5.0
France                                   2,580     103   2,683     3.3
Japan                                    2,600     106   2,706     3.3
Canada                                   1,940      91   2,031     2.5
United Kingdom                             476     197     673     0.8
======================================================================
Total                                   $64,24  $16,76  $81,01     100
                                             4       9       3
----------------------------------------------------------------------
Note:  Countries are listed in descending order on the basis of their
total pledged assistance. 

\a Includes credits and guarantees. 

\b Country total as a percent of donor total. 

\c Much of the German assistance was tied to the withdrawal of former
Soviet troops from the former East Germany. 

\d Of this amount, $5.75 billion represents CCC GSM-102 commitments
to guarantee loans. 

Source:  U.S.  Department of State. 


--------------------
\12 Of this amount, $15.6 billion was owed to commercial banks and
$9.4 billion to other private lenders.  See Paul Gardiner, "A Riddle
in a Mystery in an Enigma," Euromoney (supplement Apr.  1992). 


   SOVIET DEBT SITUATION REACHES A
   CRISIS POINT IN LATE 1991
---------------------------------------------------------- Chapter 3:2

The year 1991 marked a turning point for Soviet debt as well as for
Soviet territorial, economic, and political integrity.  The hard
currency situation worsened significantly as a result of capital
flight\13 and declining exports, particularly oil.  According to a
World Bank report, capital flight for 1991 was estimated at about $15
billion.  That figure represents a staggering 88 percent of Soviet
contractual debt service for the year and 61 percent of estimated
merchandise exports. 

According to the Wharton Econometrics Forecasting Associates (WEFA)
Group, in 1991 Soviet oil exports fell by about 50 percent from the
previous year's level; iron ore, by 64 percent; steel mill products,
70 percent; timber, 50 percent; and diesel fuel, about 25 percent.\14
Declining exports adversely affected hard currency earnings.  Whereas
1990 hard currency earnings from merchandise exports were $36
billion, according to WEFA, in 1991 the earnings equaled only about
$24.8 billion.  According to WEFA's figures, most of the decrease can
be accounted for by reduced fuel exports.  In terms of dollar
earnings, the value of Soviet fuel exports to nonsocialist countries
fell from an estimated $21.8 billion in 1990 to $9.2 billion in
1991.\15 Soviet merchandise imports also declined markedly--from
$39.5 billion in 1990 to $25.4 billion in 1991--due to the lack of
hard currency and the unwillingness of foreign commercial banks to
grant short-term credits. 

Following the failed coup in August 1991, Soviet economic
deterioration and political disintegration accelerated.  A crisis
point was reached in autumn, when the Soviet Union found itself
unable to repay all of its debts and to secure new credits badly
needed to purchase food imports.  Owing to concern about whether the
Soviet Union would continue to exist, officials of the G-7 nations
indicated that additional western loans would not be forthcoming
unless the various Soviet republics pledged to honor the Soviet
Union's debt, according to various Soviet media reports.\16 On
November 21, 1991, six Soviet republics signed an agreement with the
G-7 nations affirming joint and several liability for the outstanding
debt of the Soviet Union, based on an October 28, 1991, memorandum of
understanding.  Subsequently, two other republics also signed the
document.  (See table 3.4.) The eight also agreed to carry out
economic reforms recommended by the IMF, including reducing fiscal
deficits, public expenditures, and monetary growth and liberalizing
prices and the foreign exchange rate. 



                                    Table 3.4
                     
                       Debt Responsibility Agreed to by the
                         FSU/Successor States, 1991-1993

                 Signed 10/28/
                 91 memorandum                                 Signed agreement
                 of               Signed 12/4/91               with Russia to
                 understanding    treaty on        Preliminar  exchange FSU
Republic/        to honor debt    allocating           y debt  assets for debt,
independent      to foreign       foreign debt       shares\c  as of December
state            creditors\a      and assets\b      (percent)  1993
---------------  ---------------  ---------------  ----------  -----------------
Armenia          Yes              Yes                    0.9%  Yes

Azerbaijan       No               No                      1.6  Yes

Belarus          Yes              Yes                     4.1  Yes

Estonia          No               No                      0.6  No

Georgia          Yes              Yes                     1.6  Negotiating

Kazakhstan       Yes              Yes                     3.9  Yes

Kyrgyzstan       Yes              Yes                     1.0  Yes

Latvia           No               No                      1.1  No

Lithuania        No               No                      1.4  No

Moldova          No               No                      1.3  Yes

Russia           Yes              Yes                    61.3  \d

Tajikistan       Yes              Yes                     0.8  Yes

Turkmenistan     No               No                      0.7  Yes

Ukraine          Yes              Yes                    16.4  Negotiating

Uzbekistan       No               No                      3.3  Yes
--------------------------------------------------------------------------------
\a Signatory states agreed to accept joint and several liability for
FSU debts and to use VEB as debt manager. 

\b Agreed to accept responsibility for a portion of the FSU's foreign
debt and to set up the interrepublic debt management committee to
oversee VEB's handling of the FSU's debts and assets. 

\c As set by signatories of the December 4, 1991, treaty. 

\d Not applicable. 

Sources:  World Debt Tables 1992-93 and 1993-94, and information
provided to GAO by the Treasury Department. 


--------------------
\13 According to the World Bank, the main forms of capital flight
from Russia include (1) a portion of export revenues deposited in
overseas accounts under the pretense that the importer refused to
pay; (2) over-invoicing of imports and under-invoicing of exports;
(3) advance payments for import contracts without subsequent
deliveries; (4) capital outflow through offshore companies, many of
which were recently set up by Russian residents (legislation for
offshore business is nonexistent); and (5) growing "spontaneous
exports," mainly of consumer goods. 

\14 Planned Economies in Transition July 1992 (Bala Cynwyd, Pa.:  The
WEFA Group, 1992). 

\15 Soviet oil production and exports have been declining for several
years.  Crude oil production peaked in 1988 at 11.8 million barrels
per day (mbd).  In 1989, production was 11.4 mbd and 10.7 mbd in
1990.  In March 1993, an Energy Information Administration analyst
told us that his agency estimated 1991 production at 10.4 mbd, 1992
production at 9 mbd, and that in 1993 production would decline
another 1 mbd-1.5 mbd.  The Soviet Union exported 4.1 mbd of crude
oil and petroleum products in 1988, 3.7 mbd in 1989, and 3.2 mbd in
1990.  The analyst said his agency's preliminary forecast for the
former Soviet Union for 1993 was 2.2 mbd and that several other
forecasters were estimating that oil exports would be 2 mbd-2.1 mbd
in 1993. 

\16 See for example, Audrey Pershin, "Gorbachev Meets
Representatives," Moscow Tass International Service (Nov.  20, 1991),
as reported by the Foreign Broadcast Information Service. 


      DEBT DEFERRAL AGREEMENT OF
      NOVEMBER 1991
-------------------------------------------------------- Chapter 3:2.1

The hard currency crisis was temporarily alleviated on November 21,
1991.  On that day representatives of the G-7 nations reached
agreement with the Soviet government and governments of 8 of the 12
republics on a financial package designed to ease Soviet liquidity
problems.  According to the U.S.  Department of the Treasury, the
package included

  -- the deferral of about $3.6 billion in principal payments on
     medium- and long-term debt contracted before January 1, 1991,
     and falling due to official creditors in G-7 nations before the
     end of 1992;

  -- the maintenance of short-term credit lines by G-7 nations'
     export credit agencies; and

  -- the possible emergency financing of up to $1 billion in the form
     of a loan secured by gold. 

In December 1991, the Soviet Union was formally dissolved.  During
that month, eight republics of the Soviet Union reached preliminary
agreement among themselves on how to share the external debt and
assets of the FSU.  (See table 3.4.) The signatory republics agreed
to accept responsibility for a portion of the Soviet Union's overall
foreign debt and to set up an interrepublic debt management committee
to oversee handling the Soviet Union's debts and assets.  The
committee calculated preliminary debt shares for the 15 republics on
the basis of each republic's economic stature within the union. 
Table 3.4 shows which republics signed the agreement and the debt
shares of the republics. 

Also during December 1991, the Soviet Union suspended all principal
payments to commercial creditor banks for loans made before January
1, 1991.  An agreement between the commercial bankers and officials
of a majority of the successor states stipulated that talks on the
issue resume in March 1992. 

On January 4, 1992, 17 principal creditor nations, including the G-7
countries, met in Paris with VEB, the designated debt manager for the
8 former republics that signed the October 28, 1991, memorandum of
understanding previously discussed.  The creditors agreed to defer
principal payments on medium- and long-term official debts contracted
before January 1, 1991, and falling due from December 5, 1991, to the
end of 1992.  They said the deferral would continue beyond March 31,
1992, provided satisfactory progress were made by the debtor
countries in mobilizing foreign exchange and adopting comprehensive
macroeconomic and structural adjustment programs, in full
consultation with the IMF. 


   ROLE OF INTERNATIONAL
   INSTITUTIONS AND LINKAGE TO
   ECONOMIC REFORM
---------------------------------------------------------- Chapter 3:3

Shortly before and following the dissolution of the Soviet Union,
Ukraine, Russia, and other republics requested membership in the IMF
and the World Bank.  Membership in the international financial
institutions could lead to substantial new financial assistance from
abroad and help the new states to improve their creditworthiness. 
The United States and other members of the G-7 nations concluded that
the international financial institutions could be used to promote
economic reform in the FSU and to coordinate western financial
assistance.  They encouraged the new states to develop economic
adjustment programs that could be supported by the institutions. 

On March 31, 1992, the IMF endorsed a draft economic reform program
that had been prepared by the Russian government.  A suitable reform
program was a condition for extension of the moratorium on debt
service payments for the FSU.  Among the program's main points were
that the Russian government would (1) reduce its budget deficit to 1
percent of gross national product (GNP) by the end of 1992 through
cuts in military spending and subsidies to enterprises; (2) tighten
central bank monetary and credit policies; (3) adopt new taxes,
including restoring a 28-percent value-added tax; and (4) target
social subsidies more precisely, so aid could be provided to the most
needy and the unemployed.  Russian officials claimed the program
would slow the rate of inflation to 1 to 3 percent by the end of
1992.  They also said the reform program would have to be cut back if
Russia did not receive substantial foreign financial aid, including
debt relief, a stabilization fund for the ruble, and
balance-of-payments support.\17

On April 1, 1992, the United States and other G-7 nations announced
support for a $24 billion international aid program for Russia.  The
package was to include rescheduling of $2.5 billion of official debts
of the Russian government.  It also was to include about $11 billion
in bilateral aid (export credits and humanitarian and other foreign
aid) from the G-7 nations; $4.5 billion in loans from the IMF,\18
World Bank, and the European Bank for Reconstruction and Development;
and a $6-billion fund to stabilize the ruble for Russia and other
former Soviet republics that continued to use the ruble.  The
stabilization fund was to be funded by IMF member loans to the
IMF.\19 However, implementation of much of the aid package was seen
as contingent on Russian progress in stabilizing and reforming its
economy, and including IMF approval of an IMF standby program.\20

In mid-April 1992, the IMF Managing Director reported that the
challenge involved in trying to engineer a transformation from
command to market economies in the former Soviet republics would cost
billions of dollars in outside aid from the IMF, the World Bank, the
governments of industrial nations, and private investors over the
next 4 years.  After taking into account the expected level of
exports, the obligation to service the debt, the need to replenish
international reserves, and the allowance for a stabilization fund
for the ruble (about $6 billion), the financing requirement for 1992
in Russia alone, the Director said, could be $20 billion to $25
billion.  IMF projections for the other republics, he said, indicated
an external financing requirement of about $20 billion in 1992.  He
estimated that the IMF could provide $25 billion to $30 billion over
the next 4 to 5 years.  Other sources indicated the World Bank might
provide as much as $12 billion to $15 billion for development
projects over the same period.  The IMF Director noted that if the
transformation is to succeed, private capital will eventually have to
play the leading role.\21

On April 27, 1992, the IMF and the World Bank approved membership for
Russia and most other republics.  Russia became a member on June 1,
1992.  However, most aid was held up pending further agreement
between Russia and the IMF concerning the nature of the Russian
reform program and the terms for an IMF standby loan to Russia. 
Concerns were raised about whether Russia remained committed to and
would implement an adequate reform program.  In fact, in the spring
of 1992, the Russian reform program was relaxed in response to
attacks by domestic critics, particularly in the Russian parliament. 
For example, the government gave miners large pay increases; promised
new bank loans to help state enterprises teetering on the edge of
bankruptcy; and agreed to delay until June 1992 an 80-percent
increase in oil, gas, and electrical prices scheduled for April.\22

With final agreement on a reform package still not achieved between
Russia and the IMF by June 1992, the IMF proposed a compromise
approach:  it would advance Russia $1 billion of a planned $4-billion
standby loan before agreement was reached on the reform program.  In
July, the G-7 nations expressed support for the proposal.  On July 5,
the IMF agreed to release $1 billion to Russia; however, the $1
billion was to be retained in Russia's international reserves. 


--------------------
\17 See Jonathan E.  Sanford and Shirley A.  Kan, International
Financial Institutions:  Assistance to Soviet Successor States,
Library of Congress, Congressional Research Service Issue Brief
IB92093 (Washington, D.C.:  July 21, 1992). 

\18 The IMF is a revolving loan fund used to help member countries
that are experiencing balance of payments difficulties.  The IMF is
considered the lender of last resort.  Countries that fail to repay
the IMF are likely to be cut off from all other sources of
international finance and forced to operate on a cash-and-carry
basis.  Conversely, a country that qualifies for an IMF loan is
likely to find additional financing from other sources as well.  See
Patricia A.  Wertman, Russia and the IMF:  Coming to Terms, Library
of Congress, Congressional Research Service (Washington, D.C.:  Mar. 
25, 1994). 

\19 See Jonathan E.  Sanford and Shirley A.  Kan, Russian and Other
Ex-Soviet Participation in International Financial Institutions,
Library of Congress, Congressional Research Service Issue Brief
IB91133 (Washington, D.C.:  July 6, 1992). 

\20 IMF financial support varies, depending on the nature of the
borrower's macroeconomic and structural problems and the degree of
conditionality attached to IMF loans.  Under the IMF's regular
facilities, credit is made available to members in up to four
tranches or segments.  For first tranche loans, members are required
to demonstrate reasonable efforts to overcome their balance of
payments difficulties.  Performance criteria are not attached and
repayments are made in 3-1/2 to 5 years.  Additional or upper credit
tranche loans are normally associated with "standby arrangements." In
the latter case, loans are conditioned on macroeconomic policy
changes and economic performance targets that borrowing countries
agree to undertake in exchange for a loan.  The arrangements
typically cover a period of 1 to 2 years.  See Patricia A.  Wertman,
Quota Increase and Former Soviet Republics:  New Directions for the
IMF?  Library of Congress, Congressional Research Service Issue Brief
IB91059 (Washington, D.C.:  July 16, 1992); and 1992 International
Monetary Fund Annual Report, IMF (Washington, D.C.:  Apr.  30, 1992). 

\21 In July 1992, WEFA forecast gross financial requirements for the
FSU at approximately $120 billion over the 1993 through 1997 period. 
It estimated net direct investment and net portfolio investment at
$2.4 billion.  If the net investments reached $2.4 billion and the
IMF and the World Bank provided $45 billion, other sources would have
to supply another $72.6 billion to reach the $120-billion level. 

\22 International Financial Institutions. 


   DEBT SERVICING PROBLEMS WORSEN
---------------------------------------------------------- Chapter 3:4

In spite of the 1991 deferrals, the successor states have not kept
current on servicing the FSU debt.  As table 3.1 shows, during 1992
arrears on the Soviet debt more than doubled (from $4.8 billion at
the end of 1991 to $11.8 billion at the end of 1992).  Capital flight
continued to contribute significantly to the FSU's liquidity
problems.  The World Bank estimated capital flight during the first 8
months of 1992 at $5 billion to $8 billion ($7.5 billion to $12
billion on an annualized basis). 

In June 1992, Russian officials requested that the G-7 agree to a
5-year moratorium on repayments of principal and interest on all FSU
debt.  In July, G-7 leaders discussed a 10-year restructuring of both
principal and interest payments, with a 3- to 5-year grace period. 
At the July 1992 G-7 meetings, they expressed support for the Russian
President's proposal to defer Russia's share of the FSU debt. 
However, they also made it known that the deferral issue had to be
addressed by the Paris Club.\23 Following the G-7 meeting, the
Russian President indicated that his country would also consider
proposals for swapping debt relief for Russian land, buildings, raw
materials, and oil and gas exploration rights. 

Meanwhile, the December 1992 agreement that had deferred principal
payments on commercial FSU debt through March 1992 was reextended in
June and again in September 1992. 

Negotiations with Russia on debt restructuring got underway with the
Paris Club in late 1992.  According to the World Bank, as a result of
capital flight, lower gold sales, and already depleted reserves, FSU
external debt servicing reached only $1.3 billion during the first 3
quarters of 1992--far short of scheduled obligations. 


--------------------
\23 The Paris Club deals with restructuring of debt service payments
on loans extended by, or guaranteed by, the governments or the
official agencies of participating creditor countries.  The club,
which is open to all official creditors that accept its practices and
procedures, normally handles official multilateral debt
renegotiations. 


      DIFFERENCES BETWEEN RUSSIA
      AND OTHER REPUBLICS
      COMPLICATE SITUATION AND
      AFFECT CREDIT STANDING OF
      ALL
-------------------------------------------------------- Chapter 3:4.1

Under the G-7 Debt Allocation Treaty of December 4, 1991, Soviet
successor states were to transfer foreign exchange to VEB for FSU
debt payments.  However, in December 1992, the World Bank reported
that Russia had been the only contributor since late 1991.  One
reason why other republics had not contributed was a lack of
agreement on the disposition of the FSU assets. 

An official of the Kazakhstan bank responsible for guaranteeing
foreign loans told us that none of the former republics, except
Russia, were making payments on the FSU debt.  He said payments were
not being made because (1) Russia had not divided up the FSU assets
and (2) VEB had frozen the hard currency accounts of enterprises
located in the other states.  Ukrainian officials also told us that
the assets had not been divided and hard currency accounts had been
frozen.  Ukrainian officials also said it was not true to claim that
the other states were not paying their debt shares because Russia
might be using or might already have used hard currency from the
other states' frozen enterprise accounts to make payments on the
debt. 

Ukrainian officials said that Ukraine (1) had accepted responsibility
for 16.4 percent of the FSU's debt, (2) was ready and wanted to begin
paying off its debt, and (3) was willing to pay 20 percent of the
total debt if states other than Russia could not pay their share. 
However, the officials indicated Ukraine was not willing to make
payments on Ukraine's share through VEB, because there was no
assurance that the latter would use the monies to pay off Ukraine's
debt:  VEB might instead use the funds to pay off Russia's debt or
the debt of some other republic.  Consequently, the officials said,
Ukraine wanted to deal directly with its creditors. 

Kazakh officials said Kazakhstan had tried to arrange to pay debt
owed to Germany's Deutsche Bank directly to the bank rather than
through VEB Moscow, but Deutsche Bank had not agreed to such an
arrangement. 

Uzbek officials said the debt share apportioned to their country was
not fair.  They said Uzbekistan did not even know how much of the
FSU's debt had been expended on Uzbekistan and that Uzbekistan's
appropriate share of the old debt was still under discussion.  They
also said the Uzbekistan government was prepared to pay its share of
debt once it was provided accurate data on how Uzbekistan's share was
calculated. 

Russian officials denied that the enterprise accounts of other former
republics were frozen.  Rather, they said, all of the funds in the
enterprise accounts (estimated at $10 billion for all republics,
including Russia) had been spent by the Soviet government before the
dissolution of the Soviet Union.  The money was used to pay foreign
debts and to purchase grain and food imports.  A VEB official said
that although all of the states considered themselves responsible for
the FSU's hard currency external debt, only Russia had accepted
responsibility for the FSU's hard currency internal debt.  He
estimated the latter at approximately $11 billion to $12 billion and
said that Russia's debt claims on the various other states would be
far greater than the other states' asset claims on VEB. 

In June 1992, the Russian government launched negotiations with most
of the other states aimed at assuming responsibility for their
external debts if, in turn, the states agreed to forgo claims on the
external assets of the FSU.  As long as the issue is not fully
resolved, the credit standing of all the republics could be adversely
affected, we believe, owing to the previous agreement on joint and
several responsibility.  For example, according to the news
organization Itar-Tass, on November 2, 1992, the Russian Deputy Prime
Minister said that the Paris Club had indicated that the former
Soviet republics would need to settle their debts fully with each
other before the debt of the FSU could be rescheduled. 

Toward the end of November 1992, a tentative agreement was reached
between Ukraine and Russia, giving Russia the sole right to negotiate
with Ukraine's western creditors.  In return, Moscow promised to
negotiate a pact with Ukraine sharing remaining assets and
liabilities.  Each country reserved the right to renounce the
agreement if either failed to agree to a bilateral pact by the end of
1992.\24 However, an agreement was not reached by the end of 1992. 

According to a State Department official, the Paris Club creditors
were not willing to reschedule FSU debt unless satisfactory
arrangements were reached between Russia and Ukraine concerning
responsibility for the debt.  During the early part of 1993, Russia
and Ukraine made some progress toward reaching an agreement.  On the
basis of this progress, the Paris Club creditors felt sufficiently
comfortable to consider Russia as primarily responsible for FSU debt,
subject to conclusion of an agreement between Russia and Ukraine. 
The Paris Club decision means that the creditors will pursue Russia
first in their efforts to secure payment of FSU debt.  As of December
1993, Russia and Ukraine had still not finalized an agreement on the
handling of FSU assets and debts. 

According to the World Bank, by the end of 1993, nine republics had
signed agreements with Russia to exchange FSU assets for debt, and
Ukraine and Georgia were negotiating with Russia.  Russia had also
offered to sign agreements with the Baltic countries.  However,
according to the bank, the Baltic countries had taken the position
that they were not the legal successors of the FSU and therefore
could not take responsibility for servicing and paying off its debt. 


--------------------
\24 See "Russia and Ukraine Agree on Managing Soviet Debt," New York
Times (Nov.  24, 1992); and Leyla Boulton, "Russia Offers Deal to
Volsky," Financial Times (Nov.  14-15, 1992). 


   WESTERN NATIONS RESCHEDULE DEBT
   AND OFFER NEW FINANCIAL
   ASSISTANCE IN 1993
---------------------------------------------------------- Chapter 3:5

In early 1993, western governments became increasingly concerned
about a deteriorating political situation in Russia and the
possibility that Russia's commitment to democracy and economic reform
might be reversed (see ch.  4).  As a result, in April the G-7
nations agreed on a $28.4-billion package for providing economic
support to Russia.  In addition, as part of the effort to assist
Russia, the United States and other western creditor governments
agreed to reschedule some $15 billion in Russian and FSU debt. 


      FINANCIAL ASSISTANCE PACKAGE
-------------------------------------------------------- Chapter 3:5.1

On April 15, 1993, representatives of the G-7 nations and the
European Community announced agreement on a new package for providing
financial assistance to Russia.  A considerable portion of the G-7's
April 1992 aid package had never been forthcoming, in part because
Russia had failed to stabilize its economy and reach agreement with
the IMF on a standby agreement.  As table 3.5 shows, the 1993 package
included renewed commitments of support from 1992, totaling $7
billion, and it included $21.4 billion in new commitments for 1993. 



                               Table 3.5
                
                      Elements of the Proposed G-7
                Multilateral Support Package for Russia
                      Announced on April 15, 1993

                         (Dollars in billions)

                                                                Amount
G-7 support package                                                  s
--------------------------------------------------------------  ------
New commitments, 1993                                            $21.4
Proposed IMF Systemic Transformation Facility\a\,\b                3.0
New World Bank commitments\c                                       3.5
Cofinancing of World Bank oil sector loan                          0.5
Proposed European Bank for Reconstruction and Development          0.3
 small/medium enterprise fund
Export credits and guarantees                                     10.0
IMF standby loan\d                                                 4.1
Renewed commitments from 1992                                     $7.0
World Bank loan pipeline\e                                         1.0
IMF currency stabilization fund\f                                  6.0
----------------------------------------------------------------------
\a Defined in following pages. 

\b The G-7 urged the facility to disburse aid in two segments--the
first segment when Russia made a political commitment to adopt an
appropriate adjustment policy, as indicated by a policy statement;
the second tranche when there was satisfactory policy implementation
with focus on monetary policy measures to contain inflation, paving
the way for an IMF standby arrangement. 

\c The bank expected to provide $3 billion in new loan commitments,
above what was expected in 1992. 

\d The 1993 standby loan was expected to differ from 1992 in two
respects.  First, the loan would be larger.  (The 1992 loan was
expected to total $3 billion, but only $1 billion was disbursed due
to the lack of progress in Russian stabilization efforts.) Second,
the IMF would negotiate a fast-track standby agreement, streamlined
to focus only on the issue of stabilization. 

\e The bank would move quickly to approve and disburse unused funds
from 1992, including $500 million for import rehabilitation and $500
million for an energy sector loan. 

\f Fund was not activated in 1992 due to the lack of progress in
Russian stabilization efforts.  Fund would be activated when Russia
had an IMF standby loan and was prepared to stablize the ruble
exchange rate. 

Source:  Department of the Treasury. 

As was the case with the financial assistance offered by the G-7
nations in 1992, there was no assurance that Russia would receive all
of the aid.  While some of the assistance was expected to start
flowing quickly, fulfillment of the package remained contingent on
Russian progress in stabilizing its monetary situation and continuing
the process of structural economic reform.  In addition, much of the
assistance depended on the cooperation of multilateral institutions,
including the IMF, the World Bank, and the European Bank for
Reconstruction and Development.  Russian cooperation was also needed. 

During early 1993, the G-7 encouraged the multilateral institutions
to ease up on their normal standards for conditionality and to
provide financial assistance earlier as a way of encouraging later
reform.  On April 23, 1993, the IMF approved creation of a new loan
facility for this purpose--the Systemic Transformation Facility (STF)
that was included in the April 15 proposal of the G-7 and the
European Community.  The program is designed to provide several
billion dollars in low-interest loans to Russia, and possibly other
former socialist countries as well, under less stringent financial
conditions than is typical for IMF loans.  For example, countries are
not required to have a standby loan in place to receive STF loans. 
The loans would be approved in two segments, with the first half
disbursed immediately.  Although a standby loan program is not
required, a commitment to achieving macroeconomic stabilization is
still important for receiving STF loans.  STF is a temporary facility
that expires at the end of 1994; however, withdrawals can be
completed as late as the end of 1995.\25

In early June 1993, the IMF held up approval of an STF loan that it
was considering for Russia, in spite of pressure from the United
States and others.  However, on June 30, 1993, it approved a first
drawdown of $1.5 billion on a $3-billion loan.  In return, Russia
committed itself to reducing its budget deficit to 5 percent of gross
domestic product (GDP) and its monthly inflation level to a low,
single-digit level. 

In July 1993, the G-7 established a $3-billion privatization and
restructuring program for Russia that was expected to distribute
funds over an 18-month period.  It was to be made up of $500 million
in bilateral grants to be used largely for technical assistance to
newly privatized companies; $1 billion in bilateral export credits
and $1 billion in World Bank and European Bank for Reconstruction and
Development loans to be used by Russian companies to import western
goods; and $500 million in World Bank loans to be used by local
Russian governments to help them make up for health, education, and
other services previously supplied to employees by state-owned
companies.\26

In late September 1993, President Clinton signed a foreign aid bill
that authorized $2.5 billion of assistance for Russia. 


--------------------
\25 Russia and the IMF:  Coming to Terms. 

\26 Curt Tarnoff, U.S.  and International Assistance to the Former
Soviet Union, Library of Congress, Congressional Reseach Service
(Washington, D.C.:  Mar.  24, 1994). 


      DEBT RESCHEDULING AGREEMENTS
-------------------------------------------------------- Chapter 3:5.2

On April 2, 1993, representatives of the United States and 18 other
western creditor governments reached a political agreement with
Russia to recommend rescheduling $15 billion in Russian and FSU debt. 
The agreement concerned all arrears (at the end of 1992) on medium-
and long-term official and officially guaranteed debt incurred before
January 1, 1991, and maturities relevant to that debt falling due in
1993.  This rescheduling referred to a 10-year span, with a 5-year
grace period.  Other obligations were also rescheduled, including
those related to medium- and long-term obligations incurred during
1991, some short-term debt obligations, and some moratorium interest
falling due during 1993.  These latter obligations were rescheduled
over 7 years, with a 2-year grace period.\27

Arrears not covered by the rescheduling were to be fully paid by June
30, 1993, and Russia was required to stay current on all other
scheduled payments.  Under the agreement, interest would continue to
accrue on deferred or rescheduled debt and would have to be repaid as
it came due.  However, 60 percent of the interest due in 1993 was
rescheduled.  Governments of the creditor countries were to work out
the details in bilateral agreements with Russia.  Russia committed
itself to seek comparable terms from other external official
creditors, banks, and suppliers. 

In effect, the April agreement was a practical recognition by
official western creditors that Russia could not service most of its
debt in 1993.  By rescheduling overdue debt and debt likely to fall
into arrears in 1993, the April agreement would enable Russia to
apply for new loans from western governments and other creditors. 

According to a Treasury Department official, under the April
agreement Russia also agreed to accept responsibility for repaying
all of the official FSU debt. 

According to CCC, the April agreement was concluded outside of the
Paris Club.  Ordinarily the Paris Club does not reschedule
government-to-government debt unless an IMF economic reform program
is in place.  Nonetheless, the agreement required that the Russian
government adopt and implement an ambitious and comprehensive
macroeconomic and structural adjustment program.  The Russian
delegation stressed the strong determination of its government to
reduce Russia's economic monetary and financial imbalances and to
conclude an IMF upper credit tranche arrangement approved by the IMF
Executive Board.\28 Signatory creditor governments could declare the
agreement null and void if Russia had not concluded an upper tranche
arrangement by October 1, 1993.  Russia did not conclude such an
agreement by that time.  However, the creditor nations waived their
right to terminate the agreement.  According to a State Department
official, the creditors considered the IMF arrangement a significant
issue, but they felt it was more important to normalize relations on
the debt issue. 


--------------------
\27 World Debt Tables 1993-94. 

\28 See section in chapter 5 on arrears, debt relief, and IMF
arrangements for a discussion of the types of IMF credit
arrangements. 


      COMMERCIAL DEBT RESCHEDULING
-------------------------------------------------------- Chapter 3:5.3

As discussed earlier, in December 1991 the former Soviet Union
suspended all principal payments to commercial creditor banks made
before January 1, 1991.  In January 1992, commercial creditors,
negotiating through a bank advisory committee chaired by Deutsche
Bank, granted a 3-month rollover of debt payments.  It was extended
for each consecutive quarter through the end of 1993.  All agreements
deferred payment on current principal due during the individual
deferment periods.  Interest was mostly unpaid, however, and as of
June 30, 1993, cumulative interest arrears on commercial bank debt
were $2.4 billion, excluding late interest charges. 

On July 30, 1993, Russia signed an agreement in principle with the
commercial banks.  According to Chemical Bank, the debt at that time
included $24 billion in principal and $4.5 billion in interest
arrears.  Russia announced that it would make a $500 million partial
payment on its interest arrears by the end of 1993, and the parties
agreed to seek to restructure the overall debt in early 1994. 


   DEVELOPMENTS IN 1994
---------------------------------------------------------- Chapter 3:6

According to PlanEcon, at the end of 1993, Russia's total debt was
about $87 billion,\29 and it estimated that Russia's debt had
increased nearly $9 billion during 1993.\30

At the time of the April 2, 1993, debt rescheduling agreement between
Russia and its official creditors, the latter agreed to meet again
with Russia in 1994 to discuss further debt relief.  According to the
World Bank, the creditors' willingness to do so depended on Russia's
having an IMF upper credit tranche arrangement in place and arranging
debt relief on other obligations due in 1993 (mainly commercial bank
credit).  However, according to USDA, on January 20, 1994, Russia's
major official creditors agreed, in response to a Russian request, to
extend the terms of the April 2, 1993, agreement through April 30,
1994.  They did so even though neither of the two above conditions
was in place. 

In March 1994, a State Department official told us that Russia and
the IMF had begun serious talks on additional debt relief
arrangements.  The official indicated that debt relief was no longer
being made contingent on Russia's having an upper credit tranche
arrangement or concluding a debt rescheduling agreement with
commercial creditors.  In March 1994, the IMF Director indicated a
standby agreement would not be possible until the second half of
1994, and he said that such an agreement would depend on Russia's
planned budget for 1995 and implementation of its STF program as
intended.  In addition, he said that the IMF must have a clear idea
of how the process of disinflation was developing in 1994. 

As of March 1994, the IMF still had not approved the second half of
the $3 billion STF loan to Russia.  According to the WEFA Group, the
IMF was unhappy with Russia's lack of progress in stabilizing its
economy.\31 Subsequently, on April 20, 1994, the IMF announced
approval of the second drawdown, equivalent to about $1.5 billion. 
The IMF said it was approving the loan to support Russia's 1994
economic reform and stabilization program. 

The agreement was reached only after direct negotiations between the
IMF Managing Director and Russia's Prime Minister.  According to the
IMF Managing Director, the loan will provide foreign exchange and be
part of the general financing.  He noted that Russia has a lot of
debt payments to make to the international community. 

According to the IMF, the Russian program's main objectives are to
further reduce the rate of inflation through tighter fiscal and
monetary policies and to consolidate and strengthen structural
reforms and the transition to a market economy.  The IMF said the
monthly rate of inflation is projected to decline to 7 percent by the
end of 1994, and the federal budget deficit is expected to represent
about 7 percent of GDP during the year. 

The IMF warned that success of the Russian program hinges critically
on the strict implementation of the government's fiscal plan.  The
IMF noted that various sectors would probably be reluctant to accept
a reduced level of budgetary support.  In addition, the IMF reported
that Russia would clearly need a further comprehensive debt relief
package to normalize relations with external creditors.  The IMF said
that external financing would also be needed by Russia and other FSU
countries to help them consolidate large budget deficits in a
noninflationary manner and to finance social safety nets.  According
to the IMF, official and private external financing would be
available only in the context of strong and sustained stabilization
and a reform program.  Regarding the latter, as of November 1994,
Russia had not concluded a standby loan agreement with the IMF. 

As table 3.6 shows, the IMF, the World Bank, and the European Bank
for Reconstruction and Development delivered only $3 billion of $19
billion in aid that was announced for Russia during 1992 and 1993. 
Total official aid delivered from all sources was only $23 billion or
about 58 percent of the $40 billion announced.  According to the IMF,
much of the $17 billion that was promised but not received was due to
Russia's failure to implement appropriate macroeconomic stabilization
policies. 



                                    Table 3.6
                     
                     Official Financial Assistance to Russia,
                                     1992-93

                              (Dollars in billions)


Type of assistance\a                   A       D       A       D       A       D
--------------------------------  ------  ------  ------  ------  ------  ------
Conditional IMF financing           $9.0    $1.0   $13.0    $1.5   $14.0    $2.5
 Facilities                          3.0     1.0     7.0     1.5     8.0     2.5
 Stablization fund\c                 6.0       0     6.0       0     6.0       0
World Bank and European
 Bank for Reconstruction and         1.5       0     5.0     0.5     5.0     0.5
 Development
Bilateral creditors and European    11.0    14.0    10.0     6.0    21.0
 Union\d                              \e    12.5      \e     5.5      \e  20.0\f
 Export credits                       \e     1.5      \e     0.5      \e    18.0
 Grants                                                                      2.0
================================================================================
Total                             $21.5\   $15.0   $28.0    $8.0   $40.0   $23.0
                                       g
--------------------------------------------------------------------------------
Legend
A=announced
D= delivered

\a Excludes debt relief assistance. 

\b Excludes most double counting, that is, amounts announced but not
disbursed in 1992 and announced again in 1993. 

\c The $6 billion stablization fund was potentially available in both
1992 and 1993 to help stablize the ruble in the context of a
comprehensive reform strategy.  It was not activated because the
appropriate conditions were not in place. 

\d Does not include German grants of more than $3 billion to rehouse
Russian troops. 

\e Not reported. 

\f Excludes some items for which reliable data were not available. 

\g Excludes $2.5 billion of promised debt relief on interest payments
that was not formally granted in 1992. 

Sources:  World Economic Outlook, Part I (Washington, D.C.:  IMF,
Apr.  20, 1994).  Jeffrey D.  Sachs, Russia's Struggles with
Stabilization:  Conceptual Issues and Evidence, World Bank's Annual
Conference on Development Economics (Washington, D.C.:  Apr.  28-29,
1994). 

Table 3.6 also shows that export credits accounted for most of the
official assistance that was delivered in 1992-93.  Some observers
have been highly critical of the counting of export credits as
financial assistance.  For example, according to Jeffrey Sachs, a
former financial adviser to the Russian government, most of the
credits were short-term trade credits that had to be repaid in 1 to 3
years.  Thus, the credits became government debt that rather quickly
added to the government's debt-financing problems. 

On June 4, 1994, Russia's official creditors agreed to reschedule
about $7 billion in FSU debt payments due in 1994, including debt
contracted before 1991 and during 1991.  According to a Treasury
Department official, the $7-billion figure includes payments that had
been deferred under the January through April extension previously
discussed.  The rescheduling included some short-term debt and
previously rescheduled interest.  The agreement provided for a grace
period of 2 to 3 years, with payback periods ranging between 5 and 13
years.  Russia and its official creditors also agreed to meet later
in 1994 to discuss longer term and more comprehensive rescheduling. 

Regarding commercial debt rescheduling, on April 1, 1994, an official
of Chemical Bank advised us that talks were being held between the
Russian government and the bank advisory committee.  According to the
official, Russia had not paid any of the promised $500 million in
interest during the last quarter of 1993 and had paid no interest
during 1994. 

In October 1994, the Russian government issued a statement saying it
was prepared to assume legal responsibility for the former Soviet
Union's commercial debts.  Also, in early October 1994 there were
press reports that Russia had reached agreement with its foreign bank
creditors on a framework for a long-term rescheduling of the
commercial debt.  However, a representative of Chemical Bank advised
us that the terms of an agreement had still not been defined (e.g.,
grace period, number of years over which principal would be repaid,
contractual interest rate).  He said it was possible that an
agreement could provide for a grace period of up to 5 years and for
repayment of rescheduled debt over 10 to 15 years.  He said
commercial creditors hoped that the Russian government would make
some kind of cash payment on the debt.  There were, he said, hopes
that an agreement would be reached in the near term, but an agreement
was far from being wrapped up. 


--------------------
\29 As previously shown in table 3.1, the World Bank estimated the
FSU's debt at about $81.5 billion in mid-1993. 

\30 Review and Outlook for the Former Soviet Republics August 1994. 

\31 See, for example, Eurasia Outlook, The Countries of the Former
Soviet Union (Bala Cynwyd, PA:  The WEFA Group, Apr.  1994). 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:7

Between 1989 and 1991, the FSU experienced increasing debt problems. 
The situation reached crisis proportions in late 1991.  Russia and
many successor states eventually reached agreements whereby Russia
would accept responsibility for external FSU debt in return for the
other states not making claims on the FSU's external assets.  Russia
has agreed with its official creditors to accept responsibility for
the FSU debts.  However, as of early October 1994, Russia had still
not reached agreement with its foreign bank creditors on a framework
for rescheduling and resuming payments on the FSU commercial debts. 

Since late 1991, the United States and other official creditor
nations have provided considerable debt relief to the FSU and its
successor states.  The United States, other official creditor
nations, and the IMF have also provided important financial
assistance to Russia.  However, much of the promised financial
assistance has not been forthcoming because of insufficient progress
by Russia in stablizing and restructuring its economy.  Although
official creditor nations have provided considerable debt relief,
additional debt relief is needed. 


GENERAL ECONOMIC AND POLITICAL
SITUATION IN THE FSU/SUCCESSOR
STATES
============================================================ Chapter 4

During the past few years, the FSU and its successor states have
experienced historic economic and political change.  The process is
not yet complete.  The Soviet empire is gone, replaced by 15
successor states, and the central role of the Communist Party has
been abolished.  The region has begun to move away from the old
command economy of the FSU toward market-like economies, and some
progress has been made in establishing democratic institutions. 
However, progress varies widely across the successor states. 

The successor states' economies are in serious decline, and further
deterioration is projected for most of them.  Political legitimacy is
an issue in a number of the new states.  During 1993, Russia itself
experienced a constitutional crisis concerning the respective roles
of the parliament and the presidency in directing the affairs of the
country, the direction and pace of economic reform, and the question
of whether its leaders represented the views of the electorate.  Five
of the former Soviet republics have experienced significant armed
conflict within their borders. 

Whether efforts to create effective market-based economies and
democratic polities will succeed is not clear.  Also uncertain is
whether the political boundaries that resulted from the breakup of
the Soviet empire will survive.  Such uncertainties can affect the
willingness of westerners to invest in the new states.  Without
substantial foreign investment, the new states' creditworthiness can
be adversely affected. 


   BACKGROUND
---------------------------------------------------------- Chapter 4:1

It is 3 years since the Soviet Union disintegrated.  Shortly before
the breakup, the central administrative organs of the Communist Party
were dissolved, its assets confiscated, and its archives seized.  The
party that dominated life in the Soviet Union for decades was banned
or suspended in Russia and many other successor states.  Also gone
are the central governmental ministries and planning system in Moscow
that played major roles in directing affairs across the various
republics. 

Having discarded the Marxist-Leninist ideology, the successor states
are trying to make a transition from command economies to free and
open markets.  In addition, many have made progress toward
establishing democratic institutions.  Nonetheless, former Communist
elites continue to govern under the names of newly created parties in
many of the new states, and Communist elites cling to power at
regional and local levels as well.  Although the old Communist Party
was banned as a national organization after the 1991 coup attempt,
several neocommunist parties have been formed in Russia since then. 
They have a strong national organization and, as discussed in the
following section, experienced some success in December 1993
elections for a new parliament.\1 Former Communists were recently
returned to power in Lithuania. 

All of the states are experiencing acute economic crises that stem
from the general economic collapse that preceded the dissolution of
the Soviet Union and that has been further exacerbated by the breakup
of the empire.  Common elements of the crisis have included very high
levels of inflation, hard currency shortages, and failing public
health systems.  Many of the new states are politically unstable, not
only as a result of the economic crisis but also, in many cases,
because of a lack of political legitimacy.  Several states have been
adversely affected by intraregional and internal ethnic and civil
conflicts that have turned violent, particularly in the Caucasus\2
region (see app.  I). 


--------------------
\1 Stuart D.  Goldman, Russia, Library of Congress, Congressional
Research Service Issue Brief IB92089 (Washington, D.C.:  Mar.  25,
1994). 

\2 The Caucasus is a mountain system located between the Black Sea
and the Caspian Sea.  Armenia, Azerbaijan, and Georgia fall within
the Caucasus, as well as part of Russia. 


   THE ECONOMIC SITUATION
---------------------------------------------------------- Chapter 4:2

The economies of the former Soviet republics are in disarray. 
Economic deterioration was a major factor associated with the
development of the debt crisis and the disintegration of the Soviet
Union itself.  According to WEFA estimates, Soviet GDP fell by 2
percent in 1990 and 16.9 percent in 1991.  WEFA estimated that
aggregate GDP for the former Soviet republics declined another 20
percent during 1992.  It estimated the cumulative drop for 1990-92 at
34.9 percent.\3

PlanEcon, a Washington, D.C., economic forecasting group specializing
in East European countries, has estimated GNP losses for each of the
former Soviet republics.  According to its calculations, during 1989
through 1993, three of the republics/successor states sustained GNP
declines ranging from about 12 to 26 percent (Belarus, Turkmenistan,
and Uzbekistan); six states experienced declines of about 31 to 37
percent (Estonia, Kazakhstan, Kyrgyzstan, Moldova, Russia, and
Ukraine); five states declines of 44 to 57 percent (Armenia,
Azerbaijan, Latvia, Lithuania, and Tajikistan); and one state a
decline of about 66 percent (Georgia).\4 (See table 4.1.) The GNP
estimates indicate that economic decline in most republics is already
comparable to or greater than that experienced by the United States
during the Great Depression.\5



                               Table 4.1
                
                 Annual Percent Change in GNP for FSU/
                      Successor States, 1990-1993

                                                                 1989-
Country\a                         1990    1991    1992    1993    1993
------------------------------  ------  ------  ------  ------  ------
Georgia                          -12.4   -17.9   -43.8   -16.2   -66.2
Armenia                           -5.9   -13.1   -39.1   -13.1   -56.7
Lithuania                         -3.1   -13.0   -35.0   -17.0   -54.5
Tajikistan                        -1.3    -3.8   -30.4   -24.7   -50.2
Latvia                            -8.9    -8.3   -32.9   -10.0   -49.6
Azerbaijan                       -12.6    -0.7   -26.7   -12.4   -44.3
Moldova                            4.7    -8.1   -26.0    -7.0       -
                                                                36.7\b
Estonia                           12.6   -11.0   -25.0    -5.1       -
                                                                36.7\b
Russia                             0.6    -8.9   -19.0   -12.0   -35.0
Ukraine                           -1.5   -10.0   -13.7   -14.5   -34.6
Kyrgyzstan                         0.6    -5.0   -19.0   -14.8   -34.4
Kazakhstan                         4.7    -6.8   -13.4   -14.9       -
                                                                31.3\b
Belarus                           -6.7    -2.0   -10.0    -9.7   -25.7
Turkmenistan                       0.5    -7.1   -11.9     2.4   -16.2
Uzbekistan                        -2.7    -0.5    -9.6     0.8   -11.8
----------------------------------------------------------------------
Note:  GNP data at purchasing power parity rates, 1990 dollars. 
Percent change figures calculated by GAO. 

\a Countries are listed in ascending order for percent change during
the 1989-93 or 1990-93 period. 

\b Percent change 1990-1993. 

Source:  PlanEcon. 

According to a Congressional Research Service analysis,\6 the
breakdown of the economies of the former Soviet republics can be
attributed to the legacy of the Stalinist economic planning system
combined with incomplete economic reforms that were introduced during
the Gorbachev era.  Under the command economy, the state owned all
the means of production and controlled production and investment
decisions.  The result was an inefficient system that produced, with
only a few exceptions, poor quality goods and services.  Gorbachev's
reforms included laws to decentralize economic decisionmaking but did
not go far enough.  The reforms reduced the discipline of the
state-run economy but left intact most of its fundamental
elements--price controls, nonconvertibility of the ruble, public
ownership, and the government monopoly over most of the means of
production. 

The economic breakdown was manifested in monetary imbalances that led
to high inflation and a shortage of goods as the former Soviet
government ran up large budget deficits.  The central government
financed these deficits primarily by printing money, thereby
generating inflation as increasing amounts of rubles chased
decreasing amounts of goods.  In addition, the distribution system
collapsed.  Direct relationships between suppliers and manufacturers
and between manufacturers and distributors that were to substitute
for the centrally controlled system did not fully develop.\7


--------------------
\3 World Economic Outlook, Vol.  3 (Bala Cynwyd, PA:  The WEFA Group,
Jan.  1993). 

\4 Review and Outlook for the Former Soviet Republics February 1994,
(Washington, D.C.:  PlanEcon, Feb.  1994). 

\5 U.S.  GNP declined 30 percent between 1929 and 1933 (in terms of
1958 prices). 

\6 Russia and the Commonwealth of Independent States. 

\7 Russia and the Commonwealth of Independent States.  According to
the CIA, in 1991, the Soviet Union's total fiscal deficit was about
20 percent of GDP.  Retail prices rose as high as 140 percent. 
Inventories of food in the traditional system were drawn down to
rock-bottom levels.  Imports from outside the FSU fell by about 40
percent and exports by about 30 percent.  See Statement for the
Record, by John McLaughlin, Director of Slavic and Eurasian Analysis,
Before the Technology and National Security Subcommittee of the Joint
Economic Committee of the Congress (Washington, D.C.:  Central
Intelligence Agency, June 8, 1992). 


      FURTHER ECONOMIC DECLINE IS
      PROJECTED FOR MOST FSU
      STATES
-------------------------------------------------------- Chapter 4:2.1

In February 1994, PlanEcon forecast\8 another 2 years of economic
decline in Russia and 3 years of additional decline in Belarus and
Ukraine.  It concluded that prospects for economic recovery in
Armenia, Azerbaijan, Georgia, Moldova, and Tajikistan would remain
bleak until their various political, interethnic, and territorial
conflicts are resolved (see app.  I).  It forecast another 2 years of
economic decline or stagnation in Kyrgyzstan, Turkmenistan, and
Uzbekistan.  And it forecast another year of economic decline in
Kazakhstan.\9

There were four bright spots in PlanEcon's forecast.  Although
forecasting another year of decline in Kazakhstan, PlanEcon said it
anticipated a strong recovery in 1995 and 1996.  The recovery would
be led, directly and indirectly, by several large projects to develop
Kazakhstan's natural resource wealth that involve a commitment of
substantial resources by a significant number of major multinational
corporations.  However, PlanEcon said its forecast would be
endangered if developments materialize that discourage the continued
participation of western firms in the joint ventures.  Without the
imminent takeoff of these joint venture products, Kazakhstan's
recovery would be more closely tied to and possibly even lag behind
Russia's recovery.\10

The other bright spots were the Baltic states.  PlanEcon forecast
recovery would get underway in these states in 1994 and
1995--provided that macroeconomic stabilization policies were
continually pursued and that industrial restructuring got fully
underway.  According to PlanEcon, the Baltic states have made the
most progress in transition toward market economies of all the former
republics.  PlanEcon said that tough monetary and fiscal measures had
paid off--inflation had been sharply reduced, and all three states
boasted strong new currencies.  According to PlanEcon, (1) all three
states closed 1993 with current account surpluses; (2) their trade
balances were positive (except for Estonia); and (3) sizable aid and
loan transfers, combined with surpluses in services, have made the
near-term external payments picture quite solid.  With generally
stable monetary policies in place, PlanEcon said, they have been able
to increase the level of confidence in their currencies, raise their
foreign exchange reserves, and maintain the convertibility of their
currencies for current account transactions.  However, PlanEcon said,
the Baltic states are highly dependent on foreign trade, including
trade with the CIS.  Consequently, prospects for recovery in foreign
trade over the medium term, and thus their external payments
environment, will depend on developments in the CIS and particularly
Russia.\11


--------------------
\8 See, for example, Review and Outlook for the Former Soviet
Republics February 1994. 

\9 As discussed in ch.  5, economic forecasts of the FSU and its
successor states are difficult to make and should be used with
caution. 

\10 Review and Outlook for the Former Soviet Republics February 1994. 

\11 Review and Outlook for the Former Soviet Republics February 1994. 


      ECONOMIC REFORM HAS A LONG
      WAY TO GO
-------------------------------------------------------- Chapter 4:2.2

As discussed in chapter 3, during 1991 the IMF and the G-7 encouraged
Russia to set certain economic goals.  Of all the CIS republics,
Russia had the most reform-minded leadership, and its reform program
set the pace for the others, according to the CIA.  It has passed
many of the laws and regulations required to establish market
institutions and provide the necessary guidelines for private
business activity.  It took the lead on price deregulation.  In terms
of foreign exchange, it set exchange rates at more realistic levels,
reduced the number of goods requiring export quotas and licenses, and
abolished import quotas.  It also made some serious efforts to
stabilize its economy by reducing its budget deficit, and it made
substantial cuts in defense expenditures. 

However, Russia still has far to go to create a market economy. 
Russian fiscal and monetary restraint has weakened considerably in
the face of pressures from the old establishment for increased
spending and easier credit.  Elements of that
establishment--industrial managers, farm bureaucrats, and local
government officials--are resisting reforms that reduce their
influence and diminish their financial support. 

In addition, Russia has also fallen far short of the goals that it
outlined to the IMF in March and July 1992.  As discussed in chapter
3, the March 1992 program called for Russia to reduce its budget
deficit to 1 percent of GNP by the end of 1992 and indicated the rate
of inflation would be slowed to 1 to 3 percent by the end of the
year.  In July 1992, Russian officials indicated to the IMF that
these goals were not obtainable.  At that time, they committed to
reduce Russia's budget deficit to below 10 percent in the second half
of 1992 and to lower the monthly rate of inflation to 9 percent by
December 1992.  According to the IMF, Russia's budget deficit in 1992
was nearly 19 percent of its GDP (see table 4.2).  Regarding
inflation, PlanEcon estimated that Russia's average annual inflation
in 1992 was 1,414 percent (see table 4.3) and that it averaged about
25 percent per month during the last quarter of 1992. 



                               Table 4.2
                
                FSU/Successor States' General Government
                        Budget Balances, 1991-93


                                                                Averag
Country\a                                 1991    1992    1993     e\b
--------------------------------------  ------  ------  ------  ------
Tajikistan                                  \c   -37.0   -37.0   -37.0
Armenia                                   -1.9   -34.8   -52.0   -29.6
Georgia                                   -3.5   -35.1   -40.0   -26.2
Ukraine\d                                -15.0   -28.7   -15.0   -19.6
Moldova\d                                   \c   -26.0    -6.1   -16.1
Russia\e                                 -16.0   -18.8    -9.3   -14.7
Azerbaijan                                 2.6   -26.8   -14.4   -12.9
Uzbekistan\d                              -4.8   -13.0   -15.7   -11.2
Kyrgyzstan\d                               4.5   -14.8    -8.2    -6.2
Kazakhstan\d                              -7.9    -7.3    -2.9    -6.0
Belarus                                    3.6    -5.7   -11.8    -4.6
Lithuania                                  2.8     0.6    -0.2     1.1
Estonia                                    4.6     0.6     0.2     1.8
Turkmenistan\d                             3.5    14.1    -7.0     3.5
Latvia                                     6.3      \c     0.9     3.6
----------------------------------------------------------------------
\a Countries listed in ascending order for the average. 

\b Averages based on the number of years for which estimates are
shown and calculated by GAO. 

\c Not available. 

\d Excludes extrabudgetary funds. 

\e Includes unbudgeted import subsidies. 

Source:  IMF. 



                                    Table 4.3
                     
                     FSU/Successor States' Percent Change in
                             Consumer Prices, 1990-96

                                 (Average annual)


                                                      Averag
                                                           e
                                                       1991-
Country\a                1990  1991    1992     1993      93    1994  1995  1996
-----------------------  ----  ----  ------  -------  ------  ------  ----  ----
Georgia                     5    79     913   10,000   3,664   1,500   400   175
Ukraine                     5    87   1,019    3,500   1,535   1,750   600   300
Kazakhstan                  4    91   1,381    1,250     907     700   250   100
Tajikistan                  5    95   1,040    1,450     862     900   205   100
Belarus                     5    97   1,042    1,400     846     700   300   200
Russia                      5    94   1,414      905     804     525   175    75
Moldova                     5   110     926    1,300     779     650   175    80
Kyrgyzstan                  2   180   1,033    1,040     751     600   125    65
Armenia                    10   100     800      990     630     600   250   100
Lithuania                   8   225   1,021      410     552      70    40    30
Uzbekistan                  4    83     800      700     528     175    60    50
Turkmenistan                5   101     737      700     513     250   100    75
Azerbaijan                  5   106     533      820     486     500   300   200
Estonia                    17   211   1,069       55     445      20    10    10
Latvia                      5   124     951      108     394      25    20    17
--------------------------------------------------------------------------------
\a Countries are listed in descending order for the average percent
change during 1991-93.  Averages calculated by GAO. 

Source:  PlanEcon. 

According to the IMF, Russia reduced its budget deficit considerably
in 1993; however, the deficit was still more than 9 percent of GDP
for the year.  Russia also reduced inflation significantly during
1993.  Nonetheless, its average annual inflation for the year was 905
percent, and PlanEcon estimated that monthly inflation during the
last quarter of 1993 averaged 16 percent. 

During the first half of 1994, Russia made unexpected progress in
reducing inflation as the government maintained tighter fiscal and
monetary discipline than had been expected.\12 The average monthly
inflation rate fell below 10 percent.  PlanEcon estimated that the
federal budget deficit during the first half of the year amounted to
about 10.4 percent of GDP.  However, during the summer, monetary
policy was relaxed, raising concerns that inflation would
significantly increase before the end of the year.  In early October,
the ruble began to depreciate significantly.  A crisis erupted when
the Russian ruble lost more than 25 percent against the dollar in 1
day, October 11--raising new concerns about the effectiveness of the
government's efforts to stabilize the economy.  President Yeltsin
fired the Finance Minister, sought the resignation of the head of the
Russian Central Bank, and appointed a state commission to investigate
the situation.  The day following the collapse of the ruble, Russia's
Economic Minister was reported to have attributed the ruble collapse,
in part, to the government's easing of monetary and credit policy.\13

Progress in stabilizing economies and implementing economic reform
varies widely across the other successor states.  As table 4.2 shows,
12 other states had budget deficits in 1993.  For 10 of the 12
states, the deficits ranged between 6.1 percent to 52 percent of GDP. 
Regarding inflation, PlanEcon estimated that 12 other states had
average annual inflation rates in 1993 ranging between 410 percent
and 10,000 percent.  Estonia and Latvia, the countries with the
lowest inflation, had annual rates of 55 and 108 percent,
respectively.  (See table 4.3.)

According to PlanEcon, little progress on economic reform has been
made in many of the successor states.  For example, Armenia,
Azerbaijan, Georgia, Moldova, and Tajikistan have been sidetracked by
war, civil conflicts, and/or trade embargoes.  Kyrgyzstan,
Tajikistan, Turkmenistan, and Uzbekistan continue to adhere to many
features of the old centrally planned systems, including state
orders, price controls, and trade regulation through permits and
quotas.  Belarus has failed to undertake any significant economic
reform, partly because of a parliament dominated by old-style
Communists.  Kazakhstan hesitated in introducing market reforms
during 1992 and 1993.  Since then, it has begun to accelerate the
transition, yet is still struggling to set up the institutions needed
to manage the economy of an independent state.  Ukraine made some
progress on economic stabilization and reform during later 1992 and
early 1993, but meaningful reform was then largely abandoned in favor
of a return to greater central control.  According to PlanEcon, the
members of the old Communist Party continue to dominate that
country.\14


--------------------
\12 See, for example, Review and Outlook for the Former Soviet
Republics August 1994. 

\13 "Shokin Against Easing Anti-Inflation Policy," Moscow Interfax
(Oct.  12, 1994), as reported by the Foreign Broadcast Information
Service. 

\14 Review and Outlook for the Former Soviet Republics August 1994. 


      RECENT IMF ASSESSMENT
-------------------------------------------------------- Chapter 4:2.3

According to an IMF May 1994 assessment,\15 most FSU successor states
had not yet achieved a reasonable measure of macroeconomic stability. 
Exceptions cited were the Baltic states.\16 High inflation and budget
deficits, the IMF said, are contributing to economic uncertainty and
inefficiency, the impoverishment of vulnerable groups of people,
capital flight, and a protracted adjustment period.  The high
inflation and budget deficits are also discouraging needed foreign
investment.  According to the assessment, states that have pursued
very expansionary monetary and fiscal policies (Belarus, Russia, and
Ukraine are cited as examples) have not significantly mitigated the
large declines in output associated with the transition to market
economies. 

In those countries where macroeconomic stability has not been
achieved, the IMF said, the first priority should be to eliminate the
underlying sources of inflation--by sharply reducing budget deficits
and reining in credit growth.  Tax reform is required to enhance
revenues and reduce distortions.  Expenditure reform is required to
reduce subsidies and to target social assistance more effectively. 
Eliminating excessive credit growth requires allowing financial
markets rather than central banks to allocate credit at
market-determined rates. 

The IMF found that most countries in transition have made substantial
progress in structural reform.  In particular, it said, prices are
now largely market determined, and international trade has been
liberalized in many countries.  Privatization has also proceeded
rapidly in some--but not all--countries.  However, the IMF also found
that the reform process has been significantly delayed in most FSU
countries because the large declines in economic output, high
inflation, and erosion of the financial position of vulnerable groups
have resulted in severe economic and social strains.  In some cases,
the IMF said, the strains threaten to derail the reform process.  As
a result, it said, all countries in transition still face a daunting
agenda of structural reform, which is crucial to the medium-term
prospects for economic growth.  A priority for the FSU countries
(except the Baltics) is the elimination of the system of state
orders, bilateral trading arrangements, barter agreements, and export
controls and tariffs.  These distortionary measures should be
replaced, the IMF said, with more uniform tariff structures at low
rates, a workable interstate payments system, and a trading system
based on the most-favored nation principle.\17

According to the IMF, privatization and enterprise reform are central
to the establishment of market economies but are proceeding more
slowly in most FSU countries than had been anticipated.  As a result,
it said, the pace and scope of privatization need to be strengthened,
particularly to include the large enterprises.  Land reform,
including liberalized real estate markets and the privatization of
agricultural land, should be speeded up in most countries.  In
addition, there is an urgent need in most of the countries to
strengthen the financial sector and put in place a legal framework of
property rights and effective bankruptcy procedures. 

According to the IMF, the decline in FSU and its successor states'
output has put great strain on social, economic, and public
institutions.  It said the old, the unemployed, and the unskilled
have been exposed to severe hardship as inflation has eroded the real
value of pensions, unemployment benefits, and minimum wages.  In
general, the patchwork of enterprise-provided social services that
prevailed under central planning has not been replaced by adequate
alternatives, and the absence of a social safety net has deterred
firms from shedding labor.  IMF said that there is an urgent need to
maintain the purchasing power of many benefits in the face of
inflation and to better target benefits by overhauling eligibility
criteria and benefit structures, while keeping expenditures at levels
consistent with sustainable budgetary positions. 


--------------------
\15 World Economic Outlook (Washington, D.C.:  IMF, May 1994). 

\16 Like PlanEcon, the IMF projected that FSU successor states other
than the Baltic states would experience further economic decline in
1994.  According to the IMF, Armenia, Azerbaijan, Georgia, and
Tajikistan are all suffering from virtual economic collapse because
of wars. 

\17 Each nation would agree to extend to other nations the best trade
privileges it grants to any other nation. 


   THE POLITICAL SITUATION
---------------------------------------------------------- Chapter 4:3

The FSU's political situation is characterized by great uncertainty,
with the economic depression that has swept across each state a major
destabilizing force.  Between the latter part of 1992 and the end of
1993, Russia experienced a political and constitutional crisis that
pitted the powers of the Russian presidency against the parliament. 
The conflict also included a struggle between those who supported the
government's western-oriented market reforms, democratization, and
foreign policies against those who wanted to moderate or reverse one
or more of these policies.\18

Conflicts have arisen among the republics over the disposition of the
FSU's armed forces, nuclear weapons and other assets, and foreign
debts.  Finally, historic ethnic rivalries that were largely
suppressed during decades of Soviet rule have broken out into the
open.  They have already led to serious armed conflicts in five of
the former republics--Armenia, Azerbaijan, Georgia, Moldova, and
Tajikistan.  Each conflict has affected Russian minorities living
there, and Russia has employed military forces in some of the
conflicts to protect its minorities and other interests.  Russia has
also deployed troops within its own borders in an effort to separate
ethnic combatants and prevent a further spread of violence.  (See
app.  I.)


--------------------
\18 See, for example, Stuart D.  Goldman, Russia, Library of
Congress, Congressional Research Service Issue Brief IB92089
(Washington, July 2, 1993). 


      DEVELOPMENTS IN RUSSIA
-------------------------------------------------------- Chapter 4:3.1

Russia is the most important of the republics, because it accounts
for the large majority of the area, population, and resources of the
FSU, and because it has been in the forefront of CIS republics
attempting to institute economic and political reforms.  Russia
includes several highly disparate regions, each of which has an
economy larger than nearly all of the other former Soviet republics. 

Russia's population of more than 148 million includes over 150 ethnic
groups.  Several ethnically based groups have declared themselves
sovereign entities and are practically self-governing.  These include
the Chechen and Tuva Republics and Tatarstan.\20 One concern is
whether some of the larger ethnically based groups will be content to
remain a part of the Russian Federation or will prefer to seek full
independence.  Russia's integrity and viability could be threatened
if certain groups seek to leave the country.  A related concern is
that conflict between minorities could become violent and challenge
the Russian government's ability to maintain order.  As discussed in
appendix I, Chechens declared independence in 1991, but Russia did
not recognize Chechnya's claim to independence.  In late 1994, the
Russian government sent large military and police forces into
Chechnya to disarm the Chechens and restore Russia's authority. 
Chechens fought back fiercely.  The conflict could seriously affect
Russia's transition to democracy and a market economy. 

The number of Russian minorities in other republics is also a source
of concern.\21 Many nationalists within Russia have attacked
President Yeltsin for being too conciliatory in relations with
neighboring states where the rights of resident Russians are seen to
be at risk.  Others have worried that Russia might use actual or
alleged abuse of Russian minorities in the other successor states as
a pretext for intervention and possible territorial aggrandizement. 

As discussed previously, in early 1992 Russia embarked upon a serious
economic reform program.  During that year, the Russian President
governed largely by use of special emergency powers that allowed him
to enact changes by executive decree.  However, his government found
it increasingly difficult to implement its program because of the
rise of a powerful industrial lobby that established considerable
influence with the Russian parliament.  The lobby included large
enterprise managers, trade union leaders, and other conservatives who
wanted to roll back the government's economic reform program.  The
program threatened to restrict the lobby's powerful role in the
Russian economy by decentralizing economic decision-making and
holding firms accountable for their actions.\22 During 1992 the lobby
demanded and received hundreds of billions of rubles worth of easy
credits.  It was aided by the Russian central bank, which controlled
the printing of money and was responsible to the parliament rather
than to the President.  The bank's policy of printing rubles and
making large credits available to state-owned industry and farms
undermined the government's monetary and credit policy, threatening
hyperinflation.  As a result, the budget deficit became much larger
than planned, and high inflation rates continued unabated. 

Toward the end of 1992, a full-blown constitutional crisis developed. 
In November 1992, the President told the British Parliament that a
cabal of militant nationalists and former Communist officials were
plotting to overthrow him and sweep aside the economic and political
reforms that his government had pursued.  The President vowed to do
whatever was necessary to prevent their success.  In December,
Russia's supreme legislative body, the Congress of People's Deputies,
convened.\23 As the Congress got underway, estimates indicated that
only a minority of its members was committed to the government's
reform program; a larger minority was opposed.  A crisis occurred
when the Congress voted to not approve making the Acting Prime
Minister, Yegor Gaidar, Prime Minister.  He had spearheaded the
government's radical economic reform program.  Following his
rejection, the President declared that it had become impossible to
work with the Congress.  He called for a national referendum, to be
held in January 1993, in which the public would be asked to choose
between the Congress' or the President's ideas for leading Russia out
of its economic and political crisis.  The President said he would
resign if he did not win the vote.  The proposal was threatening to
members of the Congress, since their terms were not due to expire
until 1995 and a vote against the Congress could lead to early
elections. 

The crisis was temporarily defused in mid-December 1992 when the
President and the parliament agreed instead to hold a referendum in
April 1993 to approve the basic principles for a new constitution,
such as whether Russia should have a presidential or parliamentary
system of government.  However, in January the parliament began to
try to back away from holding a referendum.  In February the
President and the parliament explored possible compromise
power-sharing formulas that would allow them to postpone or call off
the planned April referendum.  At issue, in part, were concerns that
a referendum would contribute to separatist tendencies in Russia's
regions and to political and economic instability more generally.  In
March the Congress met in emergency session to decide whether to
pursue a referendum or approve a power-sharing arrangement between
the parliament and the presidency.  Instead, the Congress chose to
cancel the referendum and reduce the President's powers.  It gave
itself authority to suspend the President's decrees, made it easier
to remove him from office for unconstitutional conduct, and indicated
it would act to further reduce the President's powers and dismantle
many of his reforms. 

In a televised address to the nation on March 20, 1993, President
Yeltsin announced he was assuming temporary special powers to rule by
decree and indicated he intended to hold a referendum on a new
constitution and to secure a vote of public confidence in his
leadership.  Such measures were necessary, he said, to prevent
restoration of Communist power.  President Yeltsin also said that he
had ordered the Prime Minister to speed up the economic reform
process, including introduction of private land ownership, and to
assume control over Russia's central bank.  A few days later,
Russia's constitutional court ruled that the President had violated
the constitution by assuming special powers (even though the court
had not yet received a copy of a presidential decree ordering an
assumption of special powers).  On March 23, the speaker of the
parliament called for President Yeltsin's impeachment. 

This crisis eased somewhat when the President's decrees were
published, since they backed away from the assumption of special
powers.  Even so, on March 28, 1993, nearly 60 percent of the members
of the Russian Congress voted to impeach the President.  However, the
vote fell short of a required two-thirds majority.  (Only a quarter
of the legislators opposed the proposal to oust the President.) The
Congress also rejected a proposal that called for elections for both
the President and the parliament in November 1993.  The Congress then
passed a resolution calling for a referendum on April 25, with four
questions to be put to the voters.  They were whether the voters (1)
had confidence in the President, (2) approved of the social and
economic policies conducted by the President and the government since
1992, (3) considered it necessary to hold early elections for the
presidency, and (4) considered it necessary to hold early elections
for the Congress.  The Congress did not approve questioning, as had
been agreed upon in December 1992, the electorate on the basic
principles for a new constitution. 

The Congress stipulated that a majority of the electorate would have
to approve any question put to the voters before a decision would be
accepted.  The standard exceeded the normal condition for referendums
that 50 percent of the electorate simply vote.  The higher standard
was considered difficult to achieve, given an apathetic electorate. 
However, on April 21, 1993, Russia's Constitutional Court ruled that
the President need secure only a majority of votes by those actually
voting on the issues of (1) confidence in the President and (2)
approval of the President's socio-economic policy. 

In the April 25 referendum, a majority of those voting expressed
confidence in the President, his handling of the economy, and early
elections for the legislature.  Nearly a majority (49.5 percent)
voted for early presidential elections.  However, the referendum did
not bring an end to political gridlock or the constitutional crisis
that had gripped Russia for many months.  Less than a majority of the
total electorate voted for early elections to the legislature and the
presidency; consequently, early elections were not mandatory. 
Although there was a large voter turnout, key opponents of the
President sought to discredit the election results before the vote
counting had been completed and warned that the President might
resort to unconstitutional measures to further his objectives. 

Between then and September 1993, relations between President Yeltsin
and the parliament deteriorated further.  As a result, on September
21 the President announced that he was disbanding the parliament and
decreed that elections for a new legislature would be held in
December.  The lower tier of the parliament responded by voting in
favor of impeaching the President and declaring Vice President
Alexander Rutskoi as Acting President.  The latter said he was
nullifying Yeltsin's decree and named new ministers of defense,
interior, and security.  However, Yeltsin won support from the
existing defense, interior, and security ministries. 

On September 28 and 29, the Interior Ministry sealed off the White
House (the building that housed the Russian parliament) with armored
personnel carriers and barbed wire and ordered remaining armed
parliamentary deputies to surrender their arms and leave the
building.  On October 3, thousands of anti-Yeltsin demonstrators
overran police forces surrounding the parliament and seized control
of several key facilities.  There were many casualties, and the
government launched a counteroffensive.  The rebellion collapsed on
October 4 when army troops subdued the opposition, including using
armed force to retake the White House.  Rutskoi and other hardliners
were arrested.\24

Following the collapse, President Yeltsin, in a televised address to
the nation, warned that conditions in the nation remained dangerously
unstable and said that quick action was needed to eliminate the
remnants of the old system and put a new democratic structure in
place.  To this end, he called for (1) a new constitution, (2)
elections for a new parliament in December and possibly for new local
legislatures as well, and (3) unswerving commitment to continuing
economic reform. 

Elections were held in mid-December 1993 but yielded mixed results. 
Voters did approve a new constitution for Russia, but progovernment
parties fared poorly in the parliamentary elections.  Hardline
opposition parties won more than 40 percent of the popular vote and
elected more deputies than those elected by the reformist parties.\25
Ultranationalists, Communists, and their allies won the upper hand in
the Duma, the more powerful legislative chamber.  The significant
representation that they achieved reflected widespread economic
distress and increased opposition to President Yeltsin's policies.\26
Nonetheless, during the first half of 1994, Russian political
developments were surprisingly favorable, according to PlanEcon, as
the new parliament demonstrated greater professionalism and the
President, Prime Minister, and parliament achieved more stability in
their interactions with one another.\27 However, as previously
discussed, in late 1994 Russian military and police forces became
involved in a major conflict in Chechnya, and the conflict could
adversely affect Russia's transition to democracy. 


--------------------
\19 For additional information about several of the other republics,
see appendix I. 

\20 Jim Nichol, Russian Federation:  Basic Facts, Library of
Congress, Congressional Research Service (Washington, D.C.:  Feb.  6,
1992). 

\21 The percent of the population in other republics that is Russian
is:  Kazakhstan (41 percent); Latvia (33 percent); Estonia (28
percent); Kyrgyzstan (26 percent); and Ukraine (21 percent).  In
addition, Russians account for 9 to 13 percent of the population in
Belarus, Lithuania, Moldova, Tajikistan, Turkmenistan, and Uzbekistan
and 7 to 8 percent of the population of Georgia and Azerbaijan.  In
Armenia, Russians account for only 2 percent of the population. 

\22 Review and Outlook for the Former Soviet Republics, November 1992
(Washington, D.C.:  PlanEcon, Nov.  1992). 

\23 Russia had a two-tier legislature.  The Congress of People's
Deputies met twice a year in 2-week sessions.  It elected from its
ranks a Supreme Soviet, which was the day-to-day functioning
legislature. 

\24 Jim Nichol, Russia's Violent Showdown:  Chronology of Events,
September 21-October 4, 1993, Library of Congress, Congressional
Research Service (Washington, D.C.:  Oct.  5, 1993). 

\25 ERS analysts told us that they believe the share of parliamentary
seats held by nonreformers (including those who believe that reforms
should move more slowly) is at least 50 percent if not more. 

\26 Jim Nichol, Russian Legislative Elections and Constitutional
Referendum, Library of Congress, Congressional Research Service,
(Washington, D.C.:  Jan.  7, 1994).  Russia (Mar.  25, 1994). 

\27 Review and Outlook for the Former Soviet Republics August 1994. 


      POLITICAL REFORM IN THE
      OTHER STATES
-------------------------------------------------------- Chapter 4:3.2

As with economic reform, progress on political reform varies widely
across the other successor states.  According to PlanEcon, the Baltic
states have established viable democratic institutions capable of
managing the economic transition and relations with their neighbors,
especially Russia.  However, all of the other states remain
considerably or even far behind.  For example, owing to armed
conflict and civil strife, Armenia, Azerbaijan, Georgia, Moldova, and
Tajikistan have not even been able to achieve political stability. 
As a result, according to PlanEcon, none of the countries seems close
to establishing the political stability necessary to promote economic
recovery and attract foreign investment.\28

In Belarus, there was little political change until recently. 
According to PlanEcon, since January 1994, the chief of state
resigned under allegations of corruption, the parliament adopted a
new constitution, and the country elected a new president.  However,
the new president's positions on major issues remained unclear.  In
addition, parliamentary elections have not been held since 1990, and
the legislature is dominated by a faction that consists largely of
holdovers from the old Communist regime.\29

In Central Asia, the political leaders of Tajikistan, Turkmenistan,
and Uzbekistan have not strayed far from their Communist roots,
according to PlanEcon.  The President of Kyrgyzstan is characterized
as somewhat of an exception.  According to PlanEcon, he seems
genuinely committed to change.  However, he has been discouraged by
corruption and resistance to reform and recently indicated that the
people are not yet prepared for democracy.  In Kazakhstan, the other
successor state in Central Asia, policies have largely been decreed
by its executive branch, headed by President Nursultan Nazarbayev.  A
new constitution was adopted in January 1993 that provided for a
strong president (elected for 5 years), a legislature, and a
quasi-independent judiciary.  The country held its first
parliamentary elections in March 1994, with the President's political
supporters securing a large majority.  However, according to
PlanEcon, both the candidate selection process and voting were not
fair.\30

In Ukraine, the first post-independence parliamentary elections were
held in March and April 1994.  Ukraine also elected its second
post-independence president in July.  However, according to PlanEcon,
the country is still governed by a Soviet-era constitution and a
small cadre of bureaucrats, driven by greed and heavily influenced by
industrial bosses, controls the levers of both legislative and
executive authority.\31


--------------------
\28 Review and Outlook for the Former Soviet Republics August 1994. 
Moldova did manage, in February and March 1994, to hold its first
multiparty elections since the end of communist rule. 

\29 Review and Outlook for the Former Soviet Republics August 1994. 

\30 Review and Outlook for the Former Soviet Republics August 1994. 

\31 Review and Outlook for the Former Soviet Republics August 1994. 


   UNCERTAIN FUTURE
---------------------------------------------------------- Chapter 4:4

As the prior discussion indicates, the economic and political
situation in the FSU has changed dramatically, and there is much
uncertainty about its future.  As the CIA has noted, "an empire has
collapsed, the dust has barely begun to settle, and the forces that
will both buffet and propel reform are epic in proportion.  The
elements of uncertainty and unpredictability in this part of the
world are greater than at any time since the Bolshevik Revolution of
1917."\32

At issue is whether attempts to establish democratic and market-
based systems will succeed.  Also at issue is whether the political
boundaries that resulted from the breakup of the Soviet empire will
survive.  According to one observer, possible outcomes for the area
during the next decade include (1) splintering the empire into
different groupings, with widely divergent foreign policies and
cultures; (2) instability and possibly even civil war; (3)
restoration of the Russian empire under an authoritarian, xenophobic,
anti-Western regime; or (4) the emergence of truly independent
democratic nations united by some form of a common market and
collective security framework.\33

Regarding the latter two possibilities, PlanEcon recently concluded
that a few of the new states have already begun to trade some of the
normal attributes of sovereignty for closer ties with Russia.  In
support of this conclusion, it noted the following developments. 
During 1993, Russia muscled three recalcitrant countries into joining
or promising to become full members of the CIS.  Georgia had resisted
membership since the collapse of the Soviet Union, but in 1993 the
Georgian President asked for military assistance to prevent the
overthrow of his government; simultaneously, he brought Georgia into
the CIS.  Azerbaijan, faced with a series of military defeats by the
Armenians, turned to Russia for military support and, in exchange,
began to participate more actively in the CIS.  Moldova's parliament
had not ratified an agreement to participate in the CIS until Russia
pressured it to do so in the fall of 1993.  In addition, PlanEcon
said, Tajikistan and Belarus have abandoned some of the normal
attributes of sovereignty for closer integration with Russia. 
Tajikistan's ruling group lost the initial rounds of a civil war and
needed Russian assistance to reestablish control.  The current
government relies on Russian economic and security assistance to stay
in power and has agreed to follow Russian security and economic
policies.  Belarus has said it will subordinate its economic,
foreign, and security policies to Russia.  According to PlanEcon,
Kazakhstan and Ukraine are major question marks; if they relinquish
the same powers as Belarus, Russia will have reestablished the heart
of the former Soviet Union.\34

Some observers believe the successor states lack the necessary
political and economic preconditions for undertaking large and
instant reforms.  For example, Peter Reddaway, a professor of
political science and international affairs at George Washington
University in Washington, D.C., has concluded that Russia's deeply
Sovietized political culture is highly unsuited to free markets,
entrepreneurism, privatization, and the rule of law and will remain
so for a decade or two, even with sustained western assistance. 
According to Reddaway, Russians have reached the limits of their
stoicism after the demoralizing traumas of loss of empire, ideology,
and familiar institutions, and with severely diminished real
incomes.\35

Zbigniew Brzezinski, a former national security adviser to President
Carter, has also indicated that the former Soviet republics enjoy
little prospect of a successful transition to market-based
democracies in the foreseeable future.  According to him, the more
realistic scenarios for the future of the FSU include (1) continued
fragmentation of Russia itself--splitting perhaps into two or three
states, with Moslem Central Asia going its own way; (2) emergence of
an inward-oriented and rather authoritarian but modernizing Russian
national state; or (3) establishment of an authoritarian and
nationalist Russian state that seeks to recreate its imperial status. 
Brzezinski also said that the reforms demanded by the IMF and the
West as part of the privatization process would force the
post-Communist countries to accept prolonged, massive, and painful
unemployment.  This situation, he said, is politically and morally
unacceptable; rather, the West should, at a minimum, help create some
temporary safety nets for the victims of the transition process.\36

In June 1992, the CIA said that it expected the reform process to
continue in Russia and elsewhere but believed the process would be
contentious and marked by recurring crisis.  The CIA said the process
would probably last a decade--during which the downside risks would
be enormous and the range of possible outcomes wide, including
extended political deadlock and instability so serious that it could
derail reform in both the economic and political spheres.\37 In early
1993, the CIA reported that there were reasonable prospects that
Russia would continue its positive internal transformation and
integration into the western system of values, but inevitably with
continued great travail.  Moreover, it said, there remains the
possibility that Russia could revert to dictatorship or disintegrate
into chaos, with immediate disastrous consequences for the world.\38

In January 1994, the U.S.  Ambassador responsible for coordinating
U.S.  assistance to the NIS advised Congress that a titanic struggle
was underway in Russia over the future of the country.  He said the
struggle involved a long-term process that could take a generation or
more to resolve.  In March 1994, the Secretary of Defense said the
struggle could lead to a fully democratic and market-oriented Russia,
which he characterized as the best possible outcome imaginable or, in
the worst case, an authoritarian, militaristic, imperialistic nation
hostile to the West.  The latter case, he said, could see a renewal
of some new version of the old Cold War. 


--------------------
\32 Statement for the Record. 

\33 Dimitri Simes, "America and the Post-Soviet Republics," Foreign
Affairs, Vol.  71 (summer 1992), p.  1. 

\34 Review and Outlook for the Former Soviet Republics February 1994. 

\35 "Next from Russia:  `Shock Therapy' Collapse," The Washington
Post, Outlook Section (July 12, 1992). 

\36 "The West Adrift:  Vision in Search of a Strategy," The
Washington Post, Outlook Section (Mar.  1, 1992). 

\37 Statement for the Record. 

\38 Statement of George Kolt, National Intelligence Officer for
Russia and Eurasia, before the Senate Armed Services Committee,
(Washington, D.C.:  Central Intelligence Agency, Feb.  3, 1993). 


   ECONOMIC AND POLITICAL
   SITUATION CAN ADVERSELY AFFECT
   FOREIGN INVESTMENT
---------------------------------------------------------- Chapter 4:5

As discussed in chapter 1, one of the factors that affects the
creditworthiness of countries is their ability to attract foreign
exchange to finance new investment within their borders as well as
their external debt.  As discussed in chapters 3 and 5, estimates are
that Russia and the other new states will require billions of dollars
in outside financing over the next several years to engineer a
transformation from command to market economies.  However, as WEFA
recently noted, the amount of direct foreign investment already in
Russia is meager.  It noted that estimates by Russian officials vary
widely, citing figures ranging between $2 billion and $7 billion. 
Even the latter figure, WEFA said, is small relative to the size of
the Russian economy and Russia's professed desire for foreign
investment.\39

In April 1994, a Commerce Department official told us that most
observers agree that total foreign investment in Russia is not more
than $4 billion.  According to a recent report to Congress, total
U.S.  companies' investment in Russia is estimated at about $1
billion.\40

The willingness of foreigners to invest in the various new states
depends importantly on their assessments of each state's (1)
political stability; and (2) willingness to pursue the economic
reforms needed to establish viable market economies, according to
PlanEcon and WEFA.  Consequently, to the extent that there is
considerable uncertainty about the future of economic reform and
political stability in the new states, foreign direct investment is
likely to be adversely affected. 


--------------------
\39 Eurasia Outlook for Foreign Trade and Finance (Bala Cynwyd, PA: 
The WEFA Group, Jan.  1994). 

\40 National Export Strategy (Washington, D.C.:  Trade Promotion
Coordinating Committee, Oct.  1994). 


   CONCLUSION
---------------------------------------------------------- Chapter 4:6

Severe economic problems and political and ethnic tensions make the
future political and economic situation of the FSU highly uncertain. 
As long as such uncertainty persists, the FSU successor states will
be less likely to attract needed foreign investment, thus adversely
affecting their creditworthiness. 


FINANCIAL, COUNTRY RISK, AND OTHER
ASSESSMENTS OF THE FSU/SUCCESSOR
STATES' CREDITWORTHINESS
============================================================ Chapter 5

Before 1992, all of the successor states had a relatively small debt
compared to their economic output.  Since then, all would be
classified as severely indebted if held responsible for their
respective shares of the FSU debt.  Many of the FSU states have
agreed to give up their claim on FSU assets in return for Russia's
accepting their share of the FSU debt.  This situation would reduce
their debt burden but increase Russia's.  Most of the new states have
experienced severe liquidity problems.  Russia's serious and growing
arrears in debt payments, its inability to meet current and future
debt payments, and its need to reschedule its debts demonstrate
weighty creditworthiness problems.  The secondary market for trading
country debt has deeply discounted FSU securities.\1 Since Russia has
been commonly perceived as having major responsibility for the FSU's
debt, the discounting shows that commercial investors do not perceive
Russia as creditworthy.  In addition, several major, private-sector
assessments of country risk have rated Russia and all other successor
states as high-risk or low on creditworthiness.  The lack of
creditworthiness of the successor states exposes the GSM-102 program
to a high level of risk.  For example, GSM-102 credit guarantees on
the outstanding principal for the FSU and to Russia and Ukraine
equaled about 44 percent of the GSM-102 portfolio.  Moreover, these
guarantees represented nearly 60 percent of the program's portfolio
risk exposure, according to our calculations. 


--------------------
\1 The market expresses the value of a given country's loan or bond
as a percentage of its face value.  The extent to which a bond's or
loan's value is discounted in the secondary market indicates how the
financial market assesses the risk of default. 


   DEBT BURDEN AND
   CREDITWORTHINESS
---------------------------------------------------------- Chapter 5:1

The amount of a country's debt burden can be an important indicator
of its solvency--the ability to fulfill its obligations in the long
run.  All other things being equal, a country with a high debt level
poses a greater risk of default than one with a low debt level.\2 The
burden that debt poses depends, in part, on its relationship to a
country's economic output and its capacity to earn foreign exchange. 
One method used for analyzing country debt burden was developed by
the World Bank.  The bank used four indicator ratios to assess
whether developing countries are less, moderately, or severely
indebted.\3

The ratios are (1) debt to GNP, (2) debt to exports of goods and
services, (3) debt service to exports of goods and services, and (4)
interest payments to exports of goods and services.  The World Bank
established thresholds for each of the ratios to use in classifying
whether a country has a low level of indebtedness or, alternatively,
is moderately or severely indebted.  For each indicator, the bank's
moderate threshold represents 60 percent of the value of the severe
threshold.  A country is classified as "moderately" or "severely"
indebted if three of its four ratios exceed the corresponding
thresholds shown in table 5.1. 



                               Table 5.1
                
                 World Bank Debt Burden Indicators and
                    Classification Thresholds for a
                    Country's Degree of Indebtedness

                                                Moderately    Severely
                                                  indebted    indebted
Debt burden indicator ratios                    thresholds  thresholds
----------------------------------------------  ----------  ----------
Debt-to-GNP                                     30 percent  50 percent
Debt-to-exports                                        165         275
                                                   percent     percent
Debt service-to-exports                         18 percent  30 percent
Interest-to-exports                             12 percent  20 percent
----------------------------------------------------------------------
Note:  A country is classified as moderately or severely indebted if
three of the four indicators are above the thresholds. 

Source:  World Debt Tables 1989-90. 


--------------------
\2 Appendix II provides data comparing countries' debt burden levels
to their arrears, IMF arrangements, and debt relief agreements. 

\3 The World Bank revised its methodology during the final processing
of this report.  The revision bases debt indicators on the present
value of debt service rather than on the nominal value of debt to
capture the effect of borrowing terms (such as the maturity and
concessionality of loans).  The old method incorporated borrowing
terms through ratios related to debt service payments.  The present
value calculation in the new method directly incorporates borrowing
terms.  The new method, therefore, reduces the debt burden measures
from four to two.  The new method corrects for the static nature of
the old method.  The classification of most countries (i.e., about 86
percent) did not change under the new method.  We applied the old
method because data required for the new method were not available. 


      THE DEBT RATIOS
-------------------------------------------------------- Chapter 5:1.1

Debt-to-GNP Ratio.  This is the broadest measure of the solvency of a
country and its ability to fulfill its debt obligations.  A low
debt-to-GNP ratio suggests good creditworthiness, since it shows that
a nation's output is large relative to its debt obligations. 

Debt-to-Exports Ratio.  For countries that lack or are limited in
their ability to draw upon foreign exchange reserves, exports are the
principal means for obtaining foreign exchange needed to pay off
loans.  Countries with large export revenues relative to their debt
are likely to be less vulnerable to foreign exchange crises and thus
are less likely to default on their foreign loans. 

Debt Service-to-Exports Ratio.  Debt service ratios relate principal
and interest payments to revenues received from the exports of goods
and services.  They indicate a country's ability to service its debt
from hard currency export earnings. 

Interest-to-Exports Ratio.  The interest-to-exports ratio indicates a
country's debt burden from the perspective of interest payments
alone.  Creditors generally do not reschedule interest payments on
outstanding loans.  If a country needs to reschedule its debt,
creditors will want the country to at least stay current on its
interest payments.  The increasing frequency with which countries
with debt service problems are rescheduling their principal payments
has increased the relative importance of this indicator. 


      DEBT BURDEN OF THE SUCCESSOR
      STATES
-------------------------------------------------------- Chapter 5:1.2

Prior to 1992, the FSU and its successor states were not included in
the World Bank's debtor reporting system.  Therefore, we used
historical and forecast data for the FSU and the successor states to
calculate their debt burden ratios and thus classify their overall
debt burden. 

For a variety of reasons, economic forecasts for the former Soviet
Union and its successor states are difficult to make because of major
uncertainties associated with their transition from command to market
economies.  These uncertainties include the form and pace of economic
restructuring that will be attempted, the amount of external
assistance they might receive, and the extent to which they will
cooperate with each other.  In addition, official statistics of the
FSU and the new states are difficult to obtain and do not adequately
capture the growing nonstate sector.\4 Consequently, although we have
attempted to minimize these data problems by using relative
indicators such as ratios instead of absolute values, the forecast,
as well as our analysis, should be used with caution. 

Data were obtained from the WEFA Group.\5 WEFA did not provide
disaggregated data for the external debt of the successor states.  We
estimated the states' individual debts by allocating total FSU debt
according to a fall 1991 agreement among the successor states that
assigned preliminary debt shares for each of the states.  Other
economic variables necessary for calculating the ratios were obtained
from state level data as reported by WEFA.  Although WEFA stopped
making detailed forecasts for the FSU as an entity in October 1992,
it continued publishing forecasts for each former republic.  Its
forecasts for the former republics were denominated in rubles.  When
there was a need to convert them to dollar values, we used PlanEcon
data on historical or forecast market exchange rates to convert the
republic data to their dollar equivalents (see below).  The
extraordinarily severe depreciation of the ruble relative to the
dollar, however, may cause an undervaluation of the data for the
former republics. 

We made our analysis using historical and forecast data made by WEFA
in January 1993.  We were not able to obtain compatible, more recent
data to update the forecast data.  Nonetheless, we believe the
underlying economic conditions for the forecasts have not been
significantly altered for most of the successor states.  Important
problems being faced then are still being confronted by the states. 
Examples include large government budget deficits, decreasing
economic output, and high levels of inflation. 

Table 5.2 summarizes the results of our analysis, using the World
Bank's old methodology, in terms of whether and when each country is
considered to have low, moderate, or severe indebtedness during 1988
through 1997. 



                               Table 5.2
                
                 Estimated Debt Burden Problems of the
                     FSU/Successor States, 1988-97

Country             1988-91\a        1992             1993-97\a
------------------  ---------------  ---------------  ----------------
Armenia             Severe           Severe           Severe

Azerbaijan          Severe           Severe           Severe

Belarus             Low              Severe           Severe

Estonia             Severe           Severe           Severe

Georgia             Severe           Severe           Severe

Kazakhstan          Moderate         Severe           Severe

Kyrgyzstan          Severe           Severe           Severe

Latvia              Severe           Severe           Severe

Lithuania           Moderate         Severe           Severe

Moldova             Severe           Severe           Severe

Russia              Low              Severe           Severe

Tajikistan          Moderate         Severe           Severe

Turkmenistan        Moderate         Severe           Severe

Ukraine             Moderate         Severe           Severe

Uzbekistan          Moderate         Severe           Severe

Russia:\b 100%      Moderate         Severe           Severe

FSU\c               Low              Severe           Severe
----------------------------------------------------------------------
\a Based on an average of annual values for the time period.  Data
for 1993-97 are forecasts. 

\b Estimate when Russia is made responsible for the outstanding
foreign debt of the former Soviet Union. 

\c Estimate when the successor states are grouped together. 

Source:  GAO analysis of WEFA historical and January 1993 forecast
data, using the World Bank's debt burden classification method.  Debt
shares for the former republics were calculated according to a
November 1991 debt distribution formula that was agreed to by most
republics. 

As table 5.2 shows, before its dissolution in late 1991, the Soviet
Union was a less-indebted country.  If the outstanding 1988 through
1991 FSU debt were to be distributed among the republics according to
the formula agreed upon in 1991, Belarus and Russia would be
classified as less-indebted republics.  In contrast, Armenia,
Azerbaijan, Estonia, Georgia, Kyrgyzstan, Latvia, and Moldova would
fall into the severely indebted category.  For 1992, and for the 1993
through 1997 period, all of the states are classified as severely
indebted. 

As earlier indicated, we arrived at the debt classifications in table
5.2 by allocating the total FSU debt among the various republics.  As
discussed in chapter 3, many of the former republics have now reached
agreement with Russia to give up their claims on FSU assets in
exchange for Russia's assuming their shares of FSU debt.  Successor
states that do this will have reduced their debt burden and thus may
no longer be classified in the same category for the forecast years. 
At the same time, Russia will have increased its debt burden. 

While a number of successor states have benefited from Russia's
assuming responsibility for all of the FSU's debt, they have been
hurt by a reduction in transfers received from Russia.  According to
the IMF, most FSU countries have experienced a steep decline in large
explicit and implicit transfers, including fiscal transfers from the
former Soviet Union budget, which disappeared in 1992, and the
subsidy implicit in the underpricing of energy and raw material
exports (relative to world prices).  This subsidy was reduced
significantly as interstate prices for these goods were raised.  The
IMF estimated that between 1992 and 1994, the loss of official
transfers from Russia and the rise in the import bill--on the
assumption that energy and materials prices rise to world levels--may
cost the other FSU countries $15 billion, or about 15 percent of
their estimated 1994 GDP (at market exchange rates).\6

In addition, a number of successor states have fallen into serious
arrears as a result of trade deficits with other FSU countries.  For
example, PlanEcon estimated that Ukraine had a 1993 trade deficit
with CIS countries of about $2.5 billion and that it owed Russia more
than $1 billion for energy resources while having substantial arrears
with Turkmenistan for gas deliveries.  As a result, creditor states
were refusing to deliver new supplies until old arrears were paid
for.  Turkmenistan has cut back on gas deliveries to Georgia because
of the latter's inability to pay for supplies.  Armenia and Moldova
have had large trade deficits with other CIS countries, especially
Russia and Turkmenistan.  Uzbekistan reduced gas deliveries to
Kyrgyzstan and threatened to cut off all supplies if the latter did
not pay its debts.  Tajikistan has accumulated large deficits with
Russia. 


--------------------
\4 See Planned Economies in Transition Outlook, (Bala Cynwyd, PA: 
The WEFA Group, Oct.  1992).  See also, Review and Outlook for the
Former Soviet Republics November 1992. 

\5 Planned Economies in Transition, (Bala Cynwyd, PA:  The WEFA
Group, Jan.  1993). 

\6 Even so, the IMF calculated that during 1992 and 1993 new
financial transfers extended by Russia and a buildup of unpaid claims
by Russian enterprises on companies in the other countries (except
the Baltic states, which received virtually no new transfers) equaled
about 20 percent of the combined GDP of the countries. 


   LIQUIDITY AND CREDITWORTHINESS
---------------------------------------------------------- Chapter 5:2

"Liquidity," as used in this report, refers to a country's ability to
secure foreign exchange over the short- and medium-term future
sufficient to meet its debt service payments.  We used two different
methods to measure the liquidity of the successor states: 

(1) We examined the gross financial requirements of a country,
defined as the amount of financial resources needed to meet its debt
service obligations and international payments, including imports of
goods and services. 

(2) We constructed liquidity ratios that parallel the World Bank's
old method for measuring debt burden to assess the liquidity of the
successor states. 


      GROSS FINANCIAL REQUIREMENTS
      OF THE SUCCESSOR STATES
-------------------------------------------------------- Chapter 5:2.1

Table 5.3 provides recent historical and forecast data for the hard
currency financial requirements for the former Soviet Union.  Figures
for 1992 and the forecast years of 1993 through 1997 treat the 15
independent states as a single aggregate.  The data are from the WEFA
Group. 



                                    Table 5.3
                     
                       Gross Financial Requirements for the
                                   FSU, 1992-97

                            (U.S. dollars in billions)

Components                          1992    1993    1994    1995    1996    1997
--------------------------------  ------  ------  ------  ------  ------  ------
Merchandise exports                $21.0   $22.4   $24.3   $26.7   $30.5   $32.8
Merchandise imports                 21.7    22.6    23.8    25.3    26.4    28.1
Trade account balance              (0.7)   (0.2)     0.5     1.4     4.1     4.7
Current account balance            (3.9)   (5.3)   (4.6)   (3.8)   (0.8)   (0.2)
Net new debt\a                      11.3     8.5     6.2     3.4     1.5     4.1
Scheduled long-term principal        2.4     4.4     5.6     9.2    11.6    13.5
 repayments
Payments due on short-term debt     16.2    11.3    10.2     9.5    10.1    10.6
Gross financial requirements\b      30.0    24.3    21.9    22.2    23.2    28.2
--------------------------------------------------------------------------------
Note 1:  The forecast does not take account of the April 1993 and
June 1994 debt rescheduling agreements (see ch.  3). 

Note 2:  Figures in parentheses are negative numbers. 

\a Net new debt composes the current account deficit less net direct
and portfolio capital flows, changes in reserves, and other debt
valuation items. 

\b The sum of net new debt, scheduled long-term principal repayments,
and payments due on short-term debt.  The sum may not equal the total
shown due to rounding error. 

Source:  WEFA, January 1993. 

WEFA's forecast indicates that as an aggregate, the FSU will require
major assistance to meet its gross financial needs during the next
several years.  As the table shows, WEFA forecast a negative current
account balance--a nation's trade in goods and services and net
transfers--for each year during the 1993 through 1997 period.  Net
capital flows--direct and portfolio investments and changes in gold
and foreign exchange reserves (not shown in table 5.3)--were
estimated to be positive in each of the years but were not large
enough to offset the current account deficit.  Consequently, net
debt, i.e., debt in excess of reserves (also not shown in table 5.3)
is expected to grow throughout the forecast period.  The net new
credit (debt) required to finance the current account deficit and net
capital flows is expected to decrease from a high of $11.3 billion in
1992 to $1.5 billion in 1996.  However, when combined with the
financing required to meet scheduled repayments on short-term and
long-term debt, the financial requirements of the FSU and its
successor states are considerable--ranging between $22 billion and
$30 billion per year.  Unless the successor states of the FSU receive
substantial debt relief, they would require, on average, an estimated
$24 billion annually of external financing between 1993 and 1997. 

In contrast, according to the IMF, the annual average gross external
financing for developing countries as a whole and for the former
centrally planned economies as a separate grouping for 1990 to 1993
was estimated at $213 billion and $45.6 billion, respectively.  Thus,
the FSU annual gross financial requirement represents approximately
11 percent of the requirement for all developing countries and 53
percent of the gross financial requirement for all of the formerly
centrally planned economies.  It is doubtful that such a large
financial inflow can be attained from financial markets if they are
not confident that the successor states represent a growing economy
and a stable investment climate. 

We also provide in table 5.4 the distribution of the gross financial
requirements among the successor states as well as the average ratio
of the gross financial requirements to the gross domestic product for
each republic from 1993 to 1997.  The financial requirement of Russia
and Ukraine combined accounts for about 85 percent of the total
requirements for all successor states.  However, when the gross
financial requirements are viewed relative to the economic resources
of the FSU and its successor states as measured by their GDP, the
requirements of Russia and Ukraine represent only 27 percent of their
respective gross domestic products.  In contrast, the gross financial
requirement for Estonia, Kyrgyzstan, Tajikistan, and Turkmenistan is
less than $200 million each but represents several hundred percent of
their respective gross domestic products. 



                               Table 5.4
                
                  The Distribution of Estimated Annual
                  Average Gross Financial Requirements
                  Among the Successor States, 1993-97

                                                Annual
                                               average
                                               1993-97   As percent of
                                                 ($ in  gross domestic
Country                                      millions)       product\a
----------------------------------------  ------------  --------------
Armenia                                            216             58%
Azerbaijan                                         345             113
Belarus                                          1,042              64
Estonia                                            124             434
Georgia                                            333              86
Kazakhstan                                         807              67
Kyrgyzstan                                         191             442
Latvia                                             233             302
Lithuania                                          286             159
Moldova                                            259             274
Russia                                          24,134              27
Tajikstan                                          165             298
Turkmenistan                                       139             301
Ukraine                                          4,375              27
Uzbekistan                                         735             103
======================================================================
Total                                          $33,384             30%
Russia\b                                       $31,807             36%
----------------------------------------------------------------------
\a The gross domestic product of each of the former republics was
converted into U.S.  dollars using market exchange rate forecasts for
the ruble.  Consequently, the percentages are sensitive to the
devaluation of the ruble relative to the dollar.  It is advisable
that the percentages be interpreted as indicators of the relative
severity of the gross financial requirements. 

\b Estimate when Russia alone is assumed to be responsible for all
outstanding debts of the FSU. 

Source:  GAO analysis of WEFA January 1993 forecast and related data. 


      LIQUIDITY RATIOS OF THE
      SUCCESSOR STATES
-------------------------------------------------------- Chapter 5:2.2

We used four indicator ratios to measure liquidity:  (1) foreign
exchange reserves to imports, (2) current account balance to GNP, (3)
government budget balance to GNP, and (4) short-term debt (credit) to
imports.\7 These variables were selected because they are used by the
banking industry to determine a country's general ability to service
its debt in the shortterm. 

Reserves-to-Imports Ratio.  This ratio describes a country's stock of
foreign exchange relative to its annual import levels.  As such, it
measures the extent to which a country could pay for its imports out
of reserves alone if that were necessary.  Moreover, a country with
large reserves relative to imports is likely to have increased
flexibility for using reserves to help service its debt, at least
over the short run. 

Current Account Balance-to-GNP Ratio.  The current account balance
measures a country's trade in goods and services and financial flows
related to interest and dividends and transfer payments.  If a
country has a current account deficit, it is not taking in sufficient
foreign exchange from its exports of goods and services and financial
earnings inflows to offset the costs of its imports and financial
payments outflows.  A current account deficit is roughly equal to the
amount of new financing required to meet international purchases and
transfers.  The lower a country's current account deficit relative to
its GNP, the greater its potential for servicing its debt and the
lower the probability of default. 

Government Budget Balance-to-GNP Ratio.  Countries with a surplus of
central government revenues relative to expenditures are less likely
to face short-term liquidity problems.  Countries in surplus may be
able to dedicate some of the surplus to paying off foreign debt if it
is in the form of hard currency.  However, countries that have a
budget deficit will need additional domestic or foreign financing if
they want to use government monies to help pay off debt. 

Short-Term Debt (Credit)-to-Imports Ratio.  As short-term debt\8

increases relative to medium- and long-term debt, a country will
require more foreign exchange over the short term to meet its
near-term payments.  When not paid for in cash, imports represent the
amount of revolving trade credits that have to be maintained in good
order.  The ratio of short-term debt to imports is a measure of the
short-term cash flow or immediate demands on a country's foreign
exchange.  We hypothesize that as short-term debt to imports
increases, a country's creditworthiness is more likely to decrease. 

We constructed our own thresholds for these indicators by using IMF
and World Bank data on net debtor developing countries for 1986-90.\9
In October 1992, the IMF reported that 72 out of 122 net debtor
countries had experienced recent debt service difficulties because
they had incurred external payments arrears or entered into official
or commercial bank debt-rescheduling agreements during 1986 through
1990.  For each of our liquidity measures, we calculated the
liquidity ratio for each of 114 countries for each year between
1986-90.\10 We then calculated the average ratio for each country
over the 5-year period.  Since roughly 60 percent of the IMF's list
of net debtor countries (72 of 122) were designated as having a debt
service problem, we used the observation that marks the 60th
percentile on each liquidity measure as a threshold for
characterizing a severe liquidity problem.\11 We believe this is a
reasonable characterization, since arrears and rescheduling are
indicative of serious liquidity problems. 

We followed the World Bank's old method of designating "moderate"
thresholds equal to 60 percent of the value of "severe" thresholds. 
Also similar to the bank's approach, we designated a country as
having an overall moderate or severe liquidity problem only if three
or more of its liquidity ratios equaled or exceeded the moderate or
severe threshold values, respectively.  (See prior discussion on debt
burden.) Table 5.5 presents our country liquidity thresholds for the
ratios of reserves to imports, current account deficit to GNP,
government deficit to GNP, and short-term debt to imports. 



                               Table 5.5
                
                      GAO Liquidity Indicators and
                Classification Thresholds for Liquidity
                                Problems

                               (Percent)


                                                        Severe  Modera
                                                            \a    te\b
                                                        proble  proble
Liquidity indicator ratios                                  ms      ms
------------------------------------------------------  ------  ------
Reserves-to-imports                                       25.1    40.2
Current account balance-to-GNP                            -3.2    -1.9
Government budget balance-to-GNP                          -5.3    -3.2
Short-term debt-to-imports                                16.8    10.1
----------------------------------------------------------------------
\a The observation that marks the 60th percentile of net debtor
countries, 1986-90. 

\b Sixty percent of the "severe" indicator levels with the exception
of the reserves-to-imports ratio.  For the latter indicator, a higher
score represents better liquidity than a lower score.  Therefore, the
moderate threshold for this indicator represents 160 percent of the
severe threshold. 

Source:  GAO analysis of data from International Financial Statistics
(Washington, D.C.:  IMF) and World Debt Statistics (Washington, D.C.: 
World Bank).  We accessed the data from an IMF computerized data
retrieval system. 

We used data from the WEFA Group to calculate the liquidity ratios
for the successor states.  However, data were not available for
republic-level foreign currency reserves.  To estimate the foreign
currency reserves for each republic, we defined a relationship
between the FSU's foreign currency reserves and its imports and
exports.  We then estimated each republic's reserve using its export
and import data so that the level of reserves is proportional to its
external trade balance.  In addition, we used data on GDP in place of
GNP for the two ratios previously discussed that include the GNP
variable.\12 As with the debt burden analysis, we used historical and
forecast data provided by WEFA in January 1993.  Table 5.6 summarizes
the results of our analysis in terms of whether and when each country
is considered to have low, moderate, or severe liquidity problems. 



                               Table 5.6
                
                Estimated Liquidity Problems of the FSU/
                       Successor States, 1988-97

Country          1988-91\a        1992              1993-97\a
---------------  ---------------  ----------------  ------------------
Armenia          Severe           Severe            Severe

Azerbaijan       Severe           Severe            Severe

Belarus          Severe           Severe            Severe

Estonia          Severe           Moderate          Moderate

Georgia          Severe           Severe            Moderate

Kazakhstan       Moderate         Severe            Moderate

Kyrgyzstan       Severe           Severe            Severe

Latvia           Severe           Severe            Severe

Lithuania        Severe           Severe            Moderate

Moldova          Severe           Moderate          Moderate

Russia           Severe           Severe            Severe

Tajikstan        Moderate         Moderate          Moderate

Turkmenistan     Severe           Moderate          Moderate

Ukraine          Severe           Severe            Severe

Uzbekistan       Moderate         Severe            Severe

Russia\b         Severe           Severe            Severe

FSU\c            Severe           Severe            Severe
----------------------------------------------------------------------
\a Based on an average of annual values for the time period.  Data
for 1993-97 are forecasts. 

\b Estimate when Russia is made responsible for the outstanding
foreign debt of the former Soviet Union. 

\c Estimate when the NIS are grouped together. 

Source:  GAO analysis of WEFA historical and forecast data. 

As table 5.6 shows, for 1988 through 1991, the liquidity problem of
the FSU would have been classified in the severe category.  However,
if the outstanding debt at that time were distributed among the
various republics, three--Kazakhstan, Tajikistan, and
Uzbekistan--would have been classified as having moderate liquidity
problems.  The rest would have remained in the severe category. 

For 1992, 11 of the 15 successor states were estimated to have severe
liquidity problems.  The other four states were estimated to have
moderate problems.  For the forecast period, 1993 through 1997, 8 of
the 15 states are expected to experience severe liquidity problems. 
The other seven are estimated to have moderate problems.  During both
periods, Russia and the 15 successor states treated as a single
entity are estimated to have severe liquidity problems. 

Liquidity is a more appropriate measure of creditworthiness than debt
burden, since liquidity more directly measures the ability to
generate foreign currency for servicing short- and medium-term debt. 
The liquidity results indicate that most of the successor states,
including Russia, are high-risk countries because of their severe
liquidity problems. 


--------------------
\7 As discussed in the following paragraphs, we used GDP in lieu of
GNP for the successor states. 

\8 Short-term debt is debt with a maturity of less than a year. 

\9 Unlike debt burden, the World Bank does not report thresholds for
liquidity. 

\10 We analyzed data on 114 countries that participate in the World
Bank's debtor reporting system.  We excluded countries where missing
data were a problem or where data were not reported in U.S.  currency
values.  Data for a few of the variables were obtained from IMF data
series.  The countries that we analyzed included 104 of the 122
countries that the IMF designated as net debtors during 1986-90. 

\11 With the exception of the short-term debt (credit)-to-imports
ratio, a higher and/or positive score represents better liquidity
than a lower or negative score. 

\12 GNP is the sum of the total domestic and foreign output of all
residents of a country, whereas gross domestic product is the value
of goods produced and services provided in a country by its residents
and nonresidents without regard to its allocation among domestic and
foreign claims.  For many developing countries, there is little
difference between GNP and GDP.  We used GDP in our ratios for the
successor states, since GNP data were not reported for the countries
in our data source. 


   ARREARS, DEBT RELIEF, AND IMF
   ARRANGEMENTS
---------------------------------------------------------- Chapter 5:3

The amount of arrears, the need for debt relief, and the specific
types of IMF loan arrangements a country has accepted are major
indicators of a lack of creditworthiness. 

When countries with liquidity problems cannot meet all of their
immediate debt obligations, they fall into arrears.  In some cases,
arrears reflect an unwillingness to service debt.  In either case, if
arrears continue and the situation is not remedied, the country is
likely to be considered a poor credit risk.  If arrears persist
and/or become prolonged, a country may reach a point where it
concludes it cannot meet its current and future debt payments unless
it obtains debt relief. 

Debt relief is obtained by rescheduling outstanding debt or by debt
forgiveness.  Debt rescheduling alters the terms and maturity of
outstanding debt.  Debt relief is typically undertaken only after
payments have been missed or when default is imminent or has already
occurred. 

To initiate a debt renegotiation, official creditors must be
convinced that (1) the debtor country will be unable to meet its
external payments obligations unless it receives the relief and (2)
the debtor will take necessary steps to eliminate the causes of its
payment difficulties and to achieve a lasting improvement in its
external payments position.  For countries that are members of the
IMF, creditors rely on the IMF to help the debtor country design
appropriate adjustment measures.  Creditors have also required that
an "upper credit tranche" arrangement with the IMF be in place before
the start of debt renegotiations.\13 Many countries that have
accepted IMF arrangements are also countries that have rescheduled
their debts. 

As previously discussed, the Soviet Union was in substantial arrears
by the end of 1990 (see ch.  3).  In the fall of 1991, international
creditors agreed to defer a substantial amount of the country's
principal payments that were due in 1992.  Since the dissolution of
the Soviet Union in December 1991, only Russia has been making
payments on Soviet debt.  During 1992, Russia's arrears worsened, and
Russian officials requested debt relief.  In April 1993, official
creditors agreed to reschedule $15 billion in debt that was already
in arrears or scheduled for payment in 1993.  By the end of 1993 a
number of the successor states had reached agreement with Russia to
exchange their responsibility for repaying a portion of the FSU debt
in return for dropping their claims on a share of the FSU's assets
held by Russia.  In June 1994, Russia's official creditors agreed to
reschedule another $7 billion (approximately) of FSU debt already due
and/or yet to come due during 1994--indicating that Russia was unable
to fully service the debt in spite of the 1993 rescheduling. 

Meanwhile, Russia had still not reached agreement with bank creditors
on rescheduling remaining FSU commercial debt.  This issue had been
outstanding since the dissolution of the Soviet Union in December
1991.  As discussed in chapter 3, the commercial debt at the end of
July 1993 was estimated by one source at $28.5 billion. 

According to an April 1994 IMF assessment, it is clear that Russia
will require a further comprehensive debt-relief package to normalize
relations with external creditors.  And, the IMF said, Russia and the
other FSU countries will require external financing to help them
consolidate large budget deficits in a noninflationary manner and to
finance social safety nets.  But, the IMF warned, official and
private external financing will be forthcoming and helpful to Russia
and the other states only in the context of strong and sustained
stabilization and reform programs.  (See also ch.  4.) Otherwise,
foreign lending will tend to increase capital flight and external
debt and further delay the development of an environment in which a
strong private sector can emerge.\14

As discussed in chapter 2, Ukraine began defaulting on its GSM-102
loan repayments to the United States in the spring of 1994.  As of
August 17, 1994, defaults totaled about $31.1 million, and CCC had
paid $21.6 million on claims made by lenders. 

The successor states' prolonged arrears, the repeated need to
reschedule debt, and the failure to reach agreement on re-scheduling
FSU commercial debt all indicate a lack of creditworthiness. 
Successor states that have agreed with Russia to exchange their
responsibility for the FSU debt for forgoing claims on FSU assets
cannot be faulted for subsequent arrears that arise on FSU debt or a
need to further reschedule FSU debt.  However, as the recent IMF
assessment indicates, other successor countries will still require
external financing to help them consolidate large budget deficits in
a noninflationary manner and to finance social safety nets. 


--------------------
\13 When the IMF provides financial support to its members, its
support varies depending on the nature of the macroeconomic and
structural problems its members seek to address and the degree of
conditionality it attaches to its support.  The IMF provides
short-term and medium-term financing for the purpose of correcting
problems in a country's balance of payments.  It extends credit to
its members in conformity with their quotas and in four segments. 
Members are required to demonstrate only reasonable efforts to
overcome their balance-of-payments difficulties to receive the first
tranche.  The IMF does not require performance criteria for the first
segment, which is to be repaid in 3 to 5 years.  Members who want to
obtain credit beyond the first segment are required to enter into
standby arrangements.  Standby arrangements typically cover periods
of 1 to 2 years and focus on macroeconomic policies such as fiscal,
monetary, and exchange rate policies aimed at overcoming
balance-of-payments difficulties.  The IMF applies performance
criteria, such as budgetary and credit ceilings, reserve targets, and
external debt targets during the period.  Extended standby
arrangements support medium-term programs lasting 3 to 4 years and
are aimed at overcoming balance-of-payment difficulties stemming from
macroeconomic structural problems.  The IMF also provides
concessional terms to support medium-term macroeconomic adjustment
and reform to countries facing protracted balance-of-payments
problems, known as the Structural Adjustment Facility.  Countries are
required to develop 3-year policy frameworks with detailed programs
for each year, including quarterly benchmarks.  A similar program,
known as the Enhanced Structural Adjustment Facility, is also
administered by the IMF with more stringent IMF monitoring. 

\14 According to the IMF, much of $17 billion in official financing
that Russia had been promised but did not receive during 1992 and
1993 was not given because Russia had failed to implement appropriate
macroeconomic stabilization policies. 


      USDA CRITERIA FOCUS ON DEBT
      RELIEF IN ASSESSING
      CREDITWORTHINESS
-------------------------------------------------------- Chapter 5:3.1

As discussed in chapter 1, USDA's Trade and Economic Information
Division is responsible for analyzing the ability and willingness of
countries that have requested GSM-102 export credit guarantees to
meet their current and future external debts, including potential GSM
debt.  As reported in chapter 2, TEID judged FSU and Russian debt as
high risk between December 1990 and September 1992 when USDA
committed to making available more than $5 billion in export credit
guarantees to these states. 

Table 5.7 shows that TEID grades countries on a scale that ranges
between A and F, and risk is evaluated primarily in terms of whether
a country is currently involved in and likely to be involved in
future debt rescheduling.  For example, a country is classified as
"high risk" or a "D" if there is a greater than 50- percent chance
that it will reschedule its old debt during the next 3 years.  (See
table 5.7.)



                                    Table 5.7
                     
                      USDA Risk Grading Criteria for GSM-102
                                Credit Guarantees


              A               B           C               D
                                                                    F
              (below average  (average    (above average  (high     (unacceptabl
Conditions    risk)           risk)       risk)           risk)     e risk)
------------  --------------  ----------  --------------  --------  ------------
CCC claims    No\b            No\b        No              May have  May have\b
paid last 3
years

Currently     No\b            No\b        No              May be    Yes
involved in
rescheduling
old debt

Risk of       None            Small       < 50%           > 50%     Likely\c
rescheduling
old debt in
next 3 years

Risk of       None            Small       < 50%           Unlikely  Likely\c
rescheduling                                              \c
new debt in
next 3 years
--------------------------------------------------------------------------------
\a Relative to developing countries in general. 

\b Deduced by GAO from USDA information. 

\c Not further defined in terms of a probability. 

Source:  GAO, based on information provided by USDA/TEID. 

TEID considers a country's risk to be "unacceptable" or an "F" if the
state is both currently involved in rescheduling old debt and likely
to reschedule new debt within the next 3 years. 

On the basis of the analyses presented in this report and the terms
of the April 1993 and June 1994 debt-rescheduling agreements and
related developments, we believe that additional debt rescheduling
for Russia during the next 3 years is a real possibility.  As
discussed in chapter 4, Russia experienced a constitutional crisis
during 1993 that was based importantly on disagreement between the
parliament and the President over the pace and extent of economic
reform.  Although voters approved a new constitution and elected a
new parliament in December 1993, it remains to be seen whether the
executive and legislative branches will work well together.  As
presented in this chapter, Russia is shown to have both a severe debt
burden and severe liquidity problems.  Although the April 1993 debt
rescheduling alleviated Russia's liquidity problems in 1993, it has
continued to have serious problems in 1994.  In June, it entered into
another substantial rescheduling agreement with its official
creditors.  As table 5.3 showed, the FSU gross financial requirements
could exceed $20 billion per year between 1994 and 1997. 

Given these considerations, we believe that Russia would continue to
be classified as at least high risk under the TEID criteria displayed
in table 5.7.  In fact, in May 1994, USDA officials advised us that
TEID has assessed Russia as not creditworthy for more than a year. 
Other countries rated as not creditworthy by TEID included Armenia,
Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, and
Ukraine.\15 According to the officials, TEID has rated the Baltic
states, Kazakhstan, Turkmenistan, and Uzbekistan as creditworthy. 


--------------------
\15 The officials noted that while TEID might rate a country as not
creditworthy, USDA might find, after taking account of U.S. 
agricultural market development objectives, a country sufficiently
creditworthy for receiving some GSM-102 credit guarantees. 


   THE SECONDARY MARKET
---------------------------------------------------------- Chapter 5:4

The secondary market for trading developing countries' loans and
bonds is another measure that can be used to assess creditworthiness. 
Countries whose debt trades close to the face value of the loan or
bond are considered quite creditworthy, whereas those whose debt is
traded at a deep discount are not. 

Some observers have criticized the use of secondary market prices as
a measure of creditworthiness.  They assert that the market exhibits
abrupt price movements regardless of changes in the underlying
economic conditions of the debtor countries.  There have also been
allegations that publicly reported secondary prices and actual
transaction prices are different.  Additionally, not all secondary
market price movements can be linked to economic performance, as some
price movements reflect only a country's willingness to pay back its
debt.  Moreover, the ability to service debt is dependent, in part,
on the economic conditions of developed countries.  Therefore, one
might expect that the secondary market would be correlated with
global economic conditions.  However, there is little correlation
between secondary price movements and variations in measures of
global economic aggregates, such as industrial countries' growth.\16

On the other hand, we believe the secondary market is the most
reliable source of risk-adjusted valuation of debt that can be used
to convert judgmental perceptions of risk into a measurable amount in
dollars and cents.\17 Prices in the secondary market for countries
with strong growth and lower levels of external debt have been found
to be generally higher than prices in the secondary market for
countries with severe economic and debt problems in part because
investors associate strong growth and low debt with improved
creditworthiness.\18 (See ch.  6 for further discussion of why we
believe the secondary market is a useful measure.)


--------------------
\16 Przemyslaw Gajdeczka and Mark Stone, "The Secondary Market for
Developing Country Loans," Finance and Development (Dec.  1990). 

\17 GAO/GGD-93-45. 

\18 "The Secondary Market for Developing Country Loans."


      SECONDARY MARKET'S
      ASSESSMENT OF THE FSU AND
      RUSSIA
-------------------------------------------------------- Chapter 5:4.1

A secondary market has developed for FSU loans and bonds.  According
to a March 1993 trade publication, the FSU/Russian debt market had
been very illiquid.  The study reported that transactions on
FSU/Russian debt in the secondary market were very structured and
often took a few months.  Very often transactions were in the form of
debt-for-debt swaps, and each transaction was dependent on its own
specifications.  As a result, the study said, FSU/Russian debt has
been one of the most illiquid papers on the secondary market, and
total market turnover for the sovereign debt amounted to at most $200
million in 1992.\19 However, according to more recent information,
trading of FSU/Russian debt was considerably higher in 1992 (i.e.,
$678 million) and increased dramatically in 1993, to $24.7
billion.\20

According to another trade publication, Soviet debt started trading
in the secondary market in about 1990 and during 1991 traded at 55 to
60 cents on the dollar.  By spring 1992, it said, prices had fallen
to 30 to 35 cents on the dollar.\21 According to Chemical Bank data,
secondary market prices for FSU loans traded for about 17 to 21 cents
on the dollar between July 1992 and February 1993 and then fell to a
low of 10 to 11 cents on the dollar in March 1993.  Loan prices
gradually increased to reach a high of 55 cents on the dollar during
part of December 1993.  Between then and March 1994, prices again
declined, reaching a low of 28 cents on the dollar on March 21, 1994. 

Vnesheconombank began issuing Eurobonds in the late 1980s.  By March
1993, there were seven issues, amounting to a total value of $1.7
billion.  VEB made servicing of these bonds a priority, continuing to
make payments despite defaults on its debt service payments for
loans.  Consequently, the bonds have carried a higher price than the
loans since they started being quoted at a discount at the beginning
of 1991.  In mid-1991 the bonds approached 55 to 60 cents on the
dollar.  By spring 1992, they had fallen as low as 44 cents.  In June
1993, they were trading at 60 to 65 cents on the dollar. 

We believe the secondary market's valuation of FSU debt can be
considered to represent market participants' judgment about Russian
creditworthiness.  (As previously discussed, Russia has assumed
responsibility for making payments on FSU loans and bonds.) Figure
5.1 provides secondary market prices of FSU loans for July 1992 to
March 1994.\22 The low prices indicate that the market finds Russia
quite uncreditworthy. 

   Figure 5.1:  Secondary Market
   Average Monthly Prices of FSU
   Loans, July 1992-March 1994

   (See figure in printed
   edition.)

Source:  Chemical Bank.  Monthly averages calculated by GAO. 


--------------------
\19 See Letitia Rydjeski, "Russia:  The Struggle to Reform," Chemical
(New York, NY:  Chemical Bank, Mar.  20, 1993). 

\20 Emerging Markets Traders Association, 1992 Trading Volume Survey
(New York, N.Y.:  Sept.  15, 1993) and 1993 Trading Volume Survey
(New York, N.Y.:  Aug.  8, 1994). 

\21 "Russian Debt Payments Lag; Pressure to Reschedule Builds," LDC
Debt Report (Sept.  7, 1992). 

\22 According to a Chemical Bank representative, the prices were for
dollar-denominated variable-rate loans.  He said he was not aware of
any forces affecting the prices other than the evaluation of risk by
investors. 


   COUNTRY RISK ASSESSMENTS
---------------------------------------------------------- Chapter 5:5

Following the rapid growth of developing countries' debt in the early
1970s and an increasing number of debt reschedulings in the 1980s, an
assessment of the risk posed by cross-border lending and investments
grew in importance.  Therefore, the international financial community
developed country risk assessments to evaluate the risk of loss from
the future actions of debtors. 

Country risk analysis is based on a holistic approach.  It
encompasses social and economic risk, as well as "sovereign" (i.e.,
political) risk.  The latter refers to exposure arising from events
that are substantially under the control of a foreign government
rather than a country's private sector. 

A number of private organizations rate countries on the degree of
risk associated with cross-border financial transactions.  Lenders
and investors can use the ratings in deciding whether to lend to or
invest in particular countries.  We analyzed the ratings of three
publication services:  Euromoney, Institutional Investor, and
International Country Risk Guide (ICRG).  Each assigns a country risk
rating ranging between 0 for least creditworthy to 100 for most
creditworthy.  Each rating service uses a unique methodology for
assessing country risk.  Not surprisingly, there is considerable
overlap in terms of the factors each considers. 


      EUROMONEY
-------------------------------------------------------- Chapter 5:5.1

Euromoney, a leading international publication, assigns credit
ratings as a weighted average of market indicators covering access to
bond markets and trade finance, credit indicators covering payment
records and rescheduling difficulties, and analytical indicators
incorporating economic performance forecasts and political
environments. 

In April 1992, a Euromoney analysis concluded that the republics of
the FSU were not in a position to repay the full amount of their
debts at that time and that a debt restructuring package seemed
inevitable.  At the same time, the analysis said it was generally
accepted that the former Soviet republics as a whole were potentially
wealthy enough to meet their obligations over time and that debts
should be fully serviced and paid.\23

As shown in table 5.8, in September 1992, Euromoney rated Russia and
several other successor states in the range of 14.6 (Moldova) to 24.2
(Estonia) out of a possible 100.  Relative to 169 countries rated,
they fell into the bottom quartile.  Euromoney concluded that access
to bank lending by any of the successor states is "impossible" and
that their access to international bond and syndicated loan markets
is "nearly impossible."



                                    Table 5.8
                     
                      Country Risk Ratings for the Successor
                       States and Selected Other Countries,
                                       1992


                                                      Internatio
                                                             nal
                                          Institutio     Country
                              Euromoney\         nal        Risk
Country                                a  Investor\b     Guide\c  Rating    Rank
----------------------------  ----------  ----------  ----------  ------  ------
Switzerland                         98.5        91.8        89.5    98.8       1
Japan                               99.6        90.8        86.0    98.5       2
Netherlands                         99.1        88.1        86.0    98.3       3
Germany, FR                         98.2        89.8        84.0    98.2       5
United States                       98.1        87.1        83.0    97.9       7
Canada                              97.1        81.6        83.0    97.4      10
Italy                               88.7        76.1        75.0    94.5      20
Korea, Rep.                         75.5        67.6        80.0    92.1      24
UAE                                 76.5        57.3        73.0    87.1      30
China, PR                           60.7        54.9        74.0    82.0      35
Oman                                60.9        49.4        73.5    79.6      40
Turkey                              66.2        43.9        68.0    75.9      45
Mexico                              59.4        42.6        71.5    74.9      47
Venezuela                           51.1        39.0        69.5    68.2      50
Tunisia                             52.5        36.8        66.5    65.4      54
Trindad & Tobago                    41.3        27.8        65.0    53.7      60
Gambia, The                         30.5          \e        65.5    45.7      70
Egypt                               31.1        26.8        62.0    45.5      71
Zimbabwe                            42.7        26.1        55.0    45.3      72
Romania                             35.8        24.8        56.5    42.3      78
Algeria                             37.8        28.9        51.5    41.6      80
Ecuador                             28.8        20.4        61.0    40.0      83
Sri Lanka                           33.9        24.1        51.5    37.0      90
================================================================================
Russia                              21.8        23.6        52.5    31.8     100
Yemen, Rep.                         24.5          \e        54.5    30.6     102
================================================================================
Estonia                             24.2        22.1          \e    29.7     104
================================================================================
Lithuania                           24.1        20.7          \e    28.5     109
================================================================================
Latvia                              23.0        21.4          \e    28.4     110
================================================================================
Ukraine                             23.0        21.1          \e    28.1     112
================================================================================
Belarus                             21.2        21.1          \e    27.0     117
Togo                                24.7          \e        48.5    26.1     120
================================================================================
Kazakhstan                          20.8        18.7          \e    25.0     126
Mali                                24.7          \e        45.5    23.9     130
================================================================================
Uzbekistan                          18.4        16.6          \e    22.1     134
Bhutan                              20.2          \e          \e    19.2     140
================================================================================
Turkmenistan                        18.4          \e          \e    17.3     145
================================================================================
Kyrgyzstan                          17.7          \e          \e    16.5     149
================================================================================
Georgia                             17.6          \e          \e    16.4     150
================================================================================
Tajikistan                          16.7          \e          \e    15.5     152
================================================================================
Azerbaijan                          15.2          \e          \e    14.1     154
================================================================================
Armenia                             15.1          \e          \e    14.0     155
================================================================================
Moldova                             14.6          \e          \e    13.6     158
Mozambique                          10.5         7.5        39.5    13.2     160
Iraq                                 6.1         7.6        25.0     7.1     169
Cambodia                             2.6          \e          \e     5.7     170
Liberia                             12.2         6.1        13.0     4.8     171
Somalia                              7.7          \e        17.5     3.8     172
--------------------------------------------------------------------------------
\a September 1992. 

\b September 1992. 

\c August 1992. 

\d Derived by GAO from the relative country ratings of each
publication. 

\e The country was not rated. 


--------------------
\23 Paul Gardiner, "A Riddle in a Mystery in an Enigma."


      INSTITUTIONAL INVESTOR
-------------------------------------------------------- Chapter 5:5.2

Institutional Investor surveys leading international banks to rate
the creditworthiness of sovereign states.  Each bank provides its own
rating, and Institutional Investor weights the responses using a
formula that gives more importance to responses from banks with
greater worldwide exposure and more sophisticated country analysis
systems. 

In March 1992, following the demise of the Soviet Union,
Institutional Investor made its last rating for that entity.  The
score, 29.7,\24 represented a staggering decline of 34.6 points over
the previous 2-1/2 year period.  The Soviet Union's score of 29.7
placed it 58 out of the 113 countries rated by Institutional
Investor. 

In September 1992, Institutional Investor rated Russia 23.6, Belarus
21.1, Ukraine 21.1, Kazakhstan 18.7, and Uzbekistan 16.6.  These
ratings placed them 73, 78, 79, 90, and 98, respectively, among 126
countries.  With the exception of the Baltic states, individual
scores for the other republics were not reported.  The ratings for
the Baltics were lower than their March 1992 ratings.  Estonia was
rated 22.1, Latvia 21.4, and Lithuania 20.7. 


--------------------
\24 Harvey D.  Shapiro, "A Turn for the Better," Institutional
Investor (Mar.  1992). 


      INTERNATIONAL COUNTRY RISK
      GUIDE
-------------------------------------------------------- Chapter 5:5.3

International Country Risk Guide (ICRG) provides a detailed
country-by-country assessment of the risk of operating, investing in,
or lending to particular countries using a three-part system that
evaluates political, financial, and economic risk.  It assigns an
overall score to each country by using a weighting system that
allocates 50 percent of the score to political risk, 25 percent to
financial risk, and 25 percent to economic risk.  According to ICRG,
its country scores can be interpreted as in table 5.9. 

In August 1992, ICRG rated Russia 52.5, putting it slightly above
countries it considers as very high risk.  ICRG did not provide
ratings for any other former republic.  (See table 5.8.)



                               Table 5.9
                
                  ICRG Country Risk Evaluation Scoring

                                                            Degree of
Score                                                       risk
----------------------------------------------------------  ----------
0 -49.5                                                     Very high

50 -59.5                                                    Moderately
                                                            high

60 -69.5                                                    Moderate

70 -84.5                                                    Low

85 -100                                                     Very low
----------------------------------------------------------------------
Source:  International Country Risk Guide, August 1992. 


      COMPARISON OF COUNTRY RISK
      RATINGS AND OUR COMPOSITE
      RATING AND RANKING
-------------------------------------------------------- Chapter 5:5.4

As table 5.8 shows, the scores of the three rating services appear to
be generally consistent with one another in the way they rank the
creditworthiness of countries.  Not surprisingly, though, there are
some differences.  The scores of Euromoney and Institutional Investor
most closely approximate one another.  ICRG scores are generally
considerably higher than those of the other two services except for
countries that are rated as high in creditworthiness. 

Using a statistical method for effectively summarizing data from
several sources, known as "principal components analysis," we
analyzed whether the three rating services are measuring the same
phenomenon.  The analysis indicated that overall the ratings do
measure a common factor.  The principal components method was then
used to generate a combined, overall rating for each of the
countries.  To the extent that the rating services are measuring
different yet important aspects of creditworthiness and to the extent
that bias or poor information may affect their ratings of some
countries, we believe our combined ratings provide a better measure
of the relative creditworthiness of countries. 

As table 5.8 shows, the combined creditworthiness ratings for the
successor states range from a low of 13.6 points for Moldova to a
high of 31.8 points for Russia.  In terms of rankings, Moldova ranked
158 and Russia 100 out of the 172 countries rated. 


      MORE RECENT COUNTRY RISK
      RATINGS
-------------------------------------------------------- Chapter 5:5.5

The previous analysis was prepared using country risk ratings from
the August and September 1992 period.  Table 5.10 provides more
recent information on the FSU successor states for two of the rating
services, Euromoney and Institutional Investor.  The table shows that
both services ranked nearly all of the countries as worse on
creditworthiness in September 1993 as compared to September 1992. 



                                    Table 5.10
                     
                       Euromoney and Institutional Investor
                      Rankings for FSU/Successor Countries,
                                     1992-94


                                   Sept.   Sept.    Mar.   Sept.   Sept.    Mar.
Countries                             92      93      94      92      93      94
--------------------------------  ------  ------  ------  ------  ------  ------
Armenia                              154     159     162      \a      \a      \a
Azerbaijan                           153     165     154      \a      \a      \a
Belarus                              132     139     145      78     100     109
Estonia                              117     122     105      74      84      88
Georgia                              148     151     151      \a     117     125
Kazakhstan                           134     129     129      90      98      99
Kyrgyzstan                           146     144     135      \a      \a      \a
Latvia                               123     132     104      77      87      94
Lithuanaia                           118     130     110      80      93      97
Moldova                              156     160     148      \a      \a      \a
Russia                               129     137     138      73      92      98
Tajikistan                           152     163     144      \a      \a      \a
Turkmenistan                         143     148     117      \a      \a      \a
Ukraine                              122     146     149      79      96     111
Uzbekistan                           144     153     126      98     110     112
Global indicators\b
Total number of countries            169     170     167     126     132     135
 ranked\c
Median                                85      85      84      63      66      68
75 percentile                        127     128     126      95      99     102
66 percentile                        113     114     112      84      88      90
--------------------------------------------------------------------------------
\a Not rated. 

\b Based on GAO analysis of the rankings for all countries rated. 

\c Includes countries not shown in the table. 

Sources:  Euromoney and Institutional Investor.  Global ranks
calculated by GAO. 

In March 1994, all of the countries rated by Institutional Investor,
including the Baltic states, were ranked lower than they had been in
September 1993.  In March 1994, 8 of the 15 countries rated by
Euromoney, including the Baltic states, improved on their rankings
relative to September 1992 and September 1993.  Even so, four of
those countries were still ranked among the bottom quartile of all
countries rated (i.e., Kyrgyzstan, Moldova, Tajikistan, and
Uzbekistan); the other four were ranked close to or among the bottom
one-third of all countries rated (i.e., the Baltic states and
Turkmenistan, respectively).  For both services, the 1994 rankings of
Russia and Ukraine declined further compared to September 1993. 


   THE COST OF GSM-102 EXPORTS TO
   THE FSU/RUSSIA WHEN THE RISK OF
   DEFAULT IS TAKEN INTO ACCOUNT
---------------------------------------------------------- Chapter 5:6

As of August 17, 1994, the extension of GSM-102 credit guarantees for
exports to the FSU and to Russia had created a contingent liability
to the U.S.  government of about $2.9 billion for outstanding
principal payments.  That amount includes the large reschedulings
that occurred in September 1993 and early June 1994.  We used country
risk ratings and secondary market prices to estimate the risk of
default and, in turn, the expected cost of the GSM-102 loans to the
FSU and Russia as of June 1994. 


      RISK OF DEFAULT ESTIMATED
      FROM COUNTRY RISK RATINGS
-------------------------------------------------------- Chapter 5:6.1

Table 5.11 provides Euromoney country risk ratings for the FSU
successor states for three time periods between September 1992 and
March 1994 and the average of the three ratings.\25 As previously
discussed, countries were rated by Euromoney on a scale ranging
between 0 and 100.  The higher the score, the better the
creditworthiness and the lower the score, the worse the
creditworthiness. 



                                    Table 5.11
                     
                         Country Risk Ratings of the FSU/
                       Successor States and Implied Default
                                  Risk, 1992-94


                   Sept.   Sept.    Mar.           Sept.   Sept.    Mar.
Countries           1992    1993    1994    Avg.    1992    1993    1994    Avg.
----------------  ------  ------  ------  ------  ------  ------  ------  ------
Armenia            15.10   18.59   17.77   17.15     85%     81%     82%     83%
Azerbaijan         15.20   15.66   20.71   17.19      85      84      79      83
Belarus            21.20   24.63   23.75   23.19      79      75      76      77
Estonia            24.20   28.94   33.50   28.88      76      71      67      71
Georgia            17.60   21.15   22.07   20.27      82      79      78      80
Kazakhstan         20.80   26.59   28.11   25.17      79      73      72      75
Kyrgyzstan         17.70   23.53   26.58   22.60      82      76      73      77
Latvia             23.00   26.00   33.54   27.51      77      74      66      72
Lithuania          24.10   26.55   32.68   27.78      76      73      67      72
Moldova            14.60   17.70   22.89   18.40      85      82      77      82
Russia             21.80   24.69   25.96   24.15      78      75      74      76
Tajikistan         16.70   15.77   24.16   18.88      83      84      76      81
Turkmenistan       18.40   22.21   31.81   24.14      82      78      68      76
Ukraine            23.00   22.62   22.73   22.78      77      77      77      77
Uzbekistan         18.40   21.02   29.47   22.96      82      79      71      77
Average            19.45   22.38   26.38   22.74     81%     78%     74%     77%
--------------------------------------------------------------------------------
Note:  Implied default risk was calculated by subtracting each
country's score from 100 and dividing the result by 100. 

Source:  Country risk ratings are from Euromoney; GAO calculated the
average country risk ratings and the implied default risk. 

We used the country risk ratings to estimate an implied risk of the
country's defaulting on its external debt.\26 The results are
presented in table 5.11.  As with the country risk ratings, we also
calculated the average risk of default for the three time periods. 
As table 5.11 shows, the average country risk ratings for the FSU
successor states varied between a low of 17.2 for Armenia and
Azerbaijan to a high of 28.9 for Estonia.  The average implied risk
of default for the countries ranged between a low of 71 percent for
Estonia to a high of 83 percent for Armenia and Azerbaijan. 

Russia's country risk ratings ranged from 21.8 in September 1992, to
24.7 in September 1993, to 26.0 in March 1994.  Its average rating
was 24.2.  The March 1994 implied risk of Russia's defaulting was 74
percent, and its average risk of default for the September 1992 to
March 1994 period was 76 percent.  As previously stated, Russia's
contingent liability for GSM-102 debt in August 1994 was about $2.9
billion.  Using the March 1994 implied risk of default score for
Russia, we calculated that $2.1 billion in outstanding GSM-102
guaranteed principal repayments was at risk of default.  If one uses
the average risk of default score, nearly $2.2 billion was at risk of
default. 


--------------------
\25 We used Euromoney ratings in this analysis because it had the
most complete data for all FSU successor states. 

\26 The Euromoney creditworthiness ratings have been characterized by
other analysts as a reasonable measure of the market's perceived
default probabilities. 


      RISK OF DEFAULT ESTIMATED
      FROM SECONDARY MARKET PRICES
-------------------------------------------------------- Chapter 5:6.2

The average price of FSU loans in the secondary market in March 1994
was 32 cents on the dollar.  This price implies a 68-percent risk of
default at that time.\27 According to data provided to us by Chemical
Bank, between July 1992 and March 1994, the price of FSU loans in the
secondary market averaged 26.8 cents on the dollar--implying that
financial markets expected about a 73-percent discount on repayment
of outstanding FSU loans over that time period.\28 These default risk
rates are quite similar to those indicated by the Euromoney country
risk ratings previously discussed. 

The March 1994 implied risk of default through the secondary market
price suggests that $2 billion of the $2.9 billion GSM-102 principal
is at risk of default.  The average risk of default score for the
secondary market price suggests that about $2.1 billion is at risk of
default. 

These estimates do not take account of possible savings in the cost
of commodity support programs that may result when the GSM-102
program is used to promote increased exports of U.S.  commodities. 
However, as discussed in chapter 2, whether and to what extent lower
costs will result from the GSM-102 program depends importantly on the
availability of alternative markets for the exports in question and
how world market prices are affected by actions taken by other
exporter nations in the absence of U.S.  GSM program benefits for the
FSU and its successor states. 

According to an ERS official, while the potential CCC liability on
GSM loans is great, one should consider Russia's self-interest in
meeting its GSM-102 repayments responsibilities.  If Russia does not
meet its obligations, the official said, its ability to obtain future
credit from the United States and other potential creditors would be
complicated.  In addition, the official noted that if Russia repays
the credit and at an appropriate higher interest rate for rescheduled
debt, U.S.  taxpayers would endure no long-term cost under the
program.  Hence, the official said, rather than suffering a loss,
U.S.  taxpayers may earn revenue from rescheduled loans.  In
commenting on a draft of this report, USDA said GAO should examine
the terms of rescheduled debt with the FSU.  USDA said that taxpayers
do not lose money as long as the interest charge exceeds the
opportunity cost of funds to U.S.  taxpayers\29 and as long as
principal is repaid. 

We agree that Russia will have greater difficulty in obtaining future
credit if it does not meet its GSM-102 repayment obligations. 
However, whether and to what extent it will do so is the question. 
We have provided estimates of the likelihood of its repaying based on
country risk ratings and the secondary market's valuation of FSU
loans.  It is conceivable that at some point in the future Russia may
seek and obtain forgiveness for a substantial part of its GSM loan
obligations.  In the meantime, as of mid-August 1994, the United
States had already paid out $1.4 billion to cover claims on GSM-102
defaults for FSU loans and was expecting to pay out another $429
million in claims by the end of 1994 as part of the June 4, 1994,
rescheduling agreement.\30

In its comments on our draft report, USDA disagreed with our use of
the secondary market to estimate the risk of default on GSM-102
loans.\31 (See ch.  6.) However, in its comments, USDA itself
questioned whether Russia had sufficient self-interest to repay
GSM-102 debt.  USDA said that Russia's self-interest had been
overtaken by recent events, including lower import demand, large
infusions of food aid, and the fact that the Russians had not
requested new credit and did not seem very interested in staying
current on GSM-102 debt payments. 


--------------------
\27 We subtracted $0.32 from $1, divided the result by $1, and
multiplied the latter by 100. 

\28 In a recent report, we estimated probabilities of default for 170
countries based on estimates from financial markets where privately
owned sovereign debt is traded.  The estimates were based on data for
October 1992.  For Russia, we estimated a default probability of 67.6
percent.  See Credit Reform:  U.S.  Needs Better Method for
Estimating Cost of Foreign Loans and Guarantees (GAO/NSAID/GGD-95-31,
Dec.  19, 1994). 

\29 Regarding this point, a USDA official advised us that the United
States negotiated with Russia a 5.25 percent interest rate for the
GSM-102 debt that was rescheduled in September 1993.  According to
the official, this could be compared to a borrowing cost to the U.S. 
government at the time of 4.75 percent (i.e., for a 5-year Treasury
bill). 

\30 The $1.4 billion had been rescheduled and the $429 million was to
be rescheduled as well. 

\31 Our use of country risk ratings as another method for estimating
the risk of default was added to our report after USDA's comments. 
Therefore, USDA did not comment on this method. 


   IMPACT OF DEFAULT RISK ON THE
   GSM-102 PORTFOLIO
---------------------------------------------------------- Chapter 5:7

As discussed in chapter 1, the GSM statute prohibits USDA from
extending credit guarantees to any country the Secretary determines
cannot service the debt.  However, the statute does not require that
a country be considered generally creditworthy to receive GSM credit
guarantees.  In addition, the law does not provide any guidance as to
what is an acceptable level of risk in evaluating whether countries
can adequately service proposed GSM debt.  Consequently, countries
that USDA program officials assess as high risk in terms of
creditworthiness can still be approved to receive GSM credit
guarantees.  Also, the statute does not place a limit on the amount
of GSM guarantees that can be provided each year to high-risk
countries in aggregate or to individual high-risk countries.  As a
result, USDA can allocate large amounts of guarantees to high-risk
countries, making the GSM-102 portfolio subject to a potentially high
rate of default. 

In chapter 1 we showed that the FSU and two of its successor states
(Russia and Ukraine) received the largest portion of GSM-102 credit
guarantees provided during the fiscal years 1990-92.  As a result of
the large guarantees provided to the FSU and its successor states,
the GSM-102 program became considerably exposed to default by these
states.\32 Table 5.12 shows that on January 29, 1993, the FSU and its
successor states were responsible for $3.6 billion, or about 44
percent, of all outstanding principal on GSM-102 guaranteed loans. 
Except for Mexico and Algeria, which were responsible for 26 percent
and 11.5 percent, respectively, of the outstanding principal, most of
the other GSM-102 recipients each accounted for less than 1 percent
of the outstanding principal. 



                                    Table 5.12
                     
                      GSM-102 Recipient Countries' Principal
                      Outstanding 1/29/93, Percent Share of
                       Principal Outstanding, and Estimated
                        Percent Share of Principal at Risk

                   Percent share       Principal                       Estimated
                      of 1990-92  outstanding 1/   Percent share   percent share
                  GSM-102 credit     29/93 ($ in    of principal    of principal
Country\a             guarantees        million)     outstanding       at risk\b
----------------  --------------  --------------  --------------  --------------
================================================================================
FSU                        23.9%        $2,686.5           33.1%           44.6%
Mexico                      26.2         2,124.2            26.1            12.5
Algeria                     12.4           933.1            11.5            12.8
================================================================================
Russia                       4.1           742.0             9.1            11.8
Pakistan                     4.0           372.1             4.6             5.1
Korea                        9.8           344.2             4.2             0.6
================================================================================
Ukraine                      0.7           172.0             2.1             2.9
Venezuela                    2.4           144.9             1.8             1.1
Iraq                         3.2           120.0             1.5             2.6
Trinidad &                   1.0            71.3             0.9             0.8
 Tobago
Ecuador                      1.4            57.3             0.7             0.8
Yemen                        0.5            49.7             0.6             0.8
Turkey                       1.7            46.6             0.6             0.3
Romania                      0.3            45.5             0.6             0.6
Sri Lanka                    0.4            34.2             0.4             0.5
Tunisia                      0.7            30.7             0.4             0.2
Egypt                        1.5            24.2             0.3             0.3
Zimbabwe                     0.1            19.6             0.2             0.3
Others                       5.6           105.8             1.3             1.4
================================================================================
Total\c                   100.0%        $8,123.8          100.0%          100.0%
--------------------------------------------------------------------------------
\a Countries are listed by percent share of principal outstanding, in
descending order. 

\b We used the composite country risk ratings in table 5.8 to
estimate principal at risk.  The latter was calculated as outstanding
principal times (100 - country risk rating) divided by 100.  The
country risk rating for the FSU was calculated as the debt-weighted
average of the former republic ratings. 

\c Percentages may not add to 100 due to rounding error. 

Source:  GAO analysis of USDA information. 

We used the combined country risk ratings presented in table 5.8 to
estimate the principal at risk for each country participant in the
GSM-102 export credit guarantee program.\33 The results are presented
in table 5.12.  As the table shows, the exposure of the GSM-102
program to default by the FSU and its successor states is
considerably larger when the potential for default is considered. 
Whereas the FSU and its successor states together accounted for about
44 percent of the outstanding principal at the end of January 1993,
they represented approximately 59 percent of the portfolio's risk,
because their country risk ratings were lower than most of the other
GSM-102 credit guarantee recipients.  In contrast, Mexico, which
accounted for 26.1 percent of the principal exposure, represented
only 12.5 percent of the risk because its country risk ratings were
significantly higher than most of the GSM-102 recipients. 


--------------------
\32 As discussed previously, Russia began defaulting on GSM-102 loans
in the fourth quarter of 1992, and in April 1993 the United States
agreed to reschedule $1.1 billion of the debt.  In early 1994, Russia
began defaulting again on GSM loans.  In June, USDA rescheduled
another $882 million of GSM-102 debt. 

\33 As table 5.8 shows, there was considerable variability among the
three rating services.  Thus, if one prepared separate estimates of
percent share of principal at risk, the results would also vary
considerably. 


      GSM-102 PROGRAM DOES NOT USE
      RISK-BASED FEES
-------------------------------------------------------- Chapter 5:7.1

Although GSM-102 recipient countries vary significantly from one
another in terms of their risk of defaulting on GSM-102 loans, CCC
does not adjust the fee that it charges for credit guarantees to take
account of country risk.  CCC fees are based upon the length of the
credit period and the number of principal payments to be made.  For
example, for a 3-year GSM-102 loan with semiannual principal
payments, CCC charges a fee of 55.6 cents per $100, or 0.56 percent
of the covered amount.  For 3-year loans with annual principal
payments, the fee is 66.3 cents per $100.\34 CCC fees that included a
risk-based component might not cover all of the country risk, but
they could help to offset the cost of loan defaults. 

USDA officials told us that including a fee for country risk could
reduce the competitiveness of GSM-102 exports.  However, they said
they did not have recent or current data to support their claim. 

The U.S.  Export-Import Bank, which provides credit guarantees to
promote a variety of U.S.  exports, uses risk-based fees to defray
the cost of defaults on its portfolio.  Under its system, each
borrower/guarantor is rated in one of eight country risk categories. 
Exposure fees vary based on both the level of assessed risk and the
length of time provided for repayment.  For example, in the case of
repayment over 3 years, a country rated in the lowest risk category
is charged a fee of 75 cents per $100, whereas a country in the
highest risk category is charged a fee of $5.70 per $100 of coverage. 
Thus, the bank's fee structure includes a substantial added charge
for high country risk.  According to the bank, its system is designed
to remain as competitive as possible with fees charged by official
export credit agencies of other countries. 

Under section 211(b)(1)(b) of the 1990 Farm Bill, CCC is currently
restricted from charging an origination fee for any GSM-102 credit
guarantee in excess of an amount equal to 1 percent of the amount of
credit extended under the transaction.  This restriction was
initially enacted in 1985 following proposed administration
legislation to charge a 5-percent user fee for exports backed with
credit guarantees.  Some Members of Congress were concerned that such
a fee would adversely affect the competitiveness of GSM-102 exports. 
Under the 1-percent restriction, CCC would be considerably limited in
the size of the fee that it could charge to take account of country
risk should it decide to do so.  For example, as previously noted,
CCC charges 0.56 percent for a loan payable in 3 years and with
principal payments due annually.  The most it could increase the fee
would be 0.44 percent.  In contrast, the Export-Import Bank currently
charges fees as high as 5.7 percent for 3-year loans. 


--------------------
\34 The fee for a 1-year loan and repayment at the end of the term is
only 31.5 cents per $100 of coverage. 


   IMPLICATIONS OF A LACK OF
   CREDITWORTHINESS AND THE HIGH
   EXPOSURE TO DEFAULT OF THE GSM
   PORTFOLIO
---------------------------------------------------------- Chapter 5:8

The various analyses previously presented above indicate that Russia
and the other successor states are high-risk countries in terms of
creditworthiness.  Russia is severely indebted, and its agreement to
accept responsibility for the other states' shares of the FSU debt
increases its burden.  Most of the successor states, including
Russia, have severe liquidity problems, and these problems are likely
to persist for the next several years.  Russia's arrearage problems
and its need to reschedule its debts also demonstrate a lack of
creditworthiness.  In addition, secondary market valuations of FSU
debt and country risk ratings point to poor creditworthiness. 

The large amount of GSM-102 export credit guarantees already provided
to the FSU and its successor states, along with their low
creditworthiness, means that the GSM-102 portfolio is exposed to a
high level of risk that could result in additional, substantial costs
to U.S.  taxpayers.  As earlier discussed, in September 1993 and June
1994 the United States rescheduled large amounts of GSM-102 debt. 
Providing the successor states with more guarantees at this time
would add to the already high exposure of the GSM-102 portfolio to
further defaults.  Since the GSM-102 program provides financing with
terms up to only 3 years, additional guarantees for the successor
states would add to the difficult liquidity problems that they are
expected to experience over the next several years.  Consequently,
the GSM-102 program may not be an appropriate vehicle for continued
financing of U.S.  agricultural exports to the FSU successor states
at this time. 

Nonetheless, there may be important economic and national security
reasons for the United States to further assist the financing of food
exports to Russia and one or more successor states.  For example, if
circumstances arise where the Russian government cannot obtain the
hard currency to pay for food imports needed to balance its food
needs, political stability could be threatened.  In a major policy
statement on April 1, 1993, President Clinton said that nothing could
contribute more to global freedom, security, and prosperity than the
peaceful progression of Russia's transformation from a totalitarian
state into a democracy, a command economy into a market, and an
empire into an a modern nation-state.\35 However, he noted, the
outcome is not assured.  The President warned of the danger of
Russia, with its vast arsenal of nuclear weapons, being torn apart by
the ethnic strife that has engulfed former Yugoslavia.  If Russia
were to revert to imperialism or plunge into chaos, he said, the
United States would need to reassess its plans for defense savings. 
This could mean billions of less dollars for other uses, including
creating new businesses and new jobs in the United States.  America's
interests, he said, lie with Russian reform and Russian reformers,
and America's position is to support democracy and free markets in
Russia and the other new independent states. 

In support of the policy statement, on April 4, 1993, President
Clinton announced a $1.6 billion assistance package for Russia for
1993.  As discussed in chapter 3, on April 15, the United States, in
concert with the G-7 nations, announced a financial assistance
program of $28.4 billion for Russia.  Also on April 15, the Secretary
of State announced that the administration would propose to Congress
another U.S.  aid package for Russia of $1.3 billion in direct aid
and $500 million in assistance to be channeled through international
assistance agencies.  Subsequently on September 30, 1993, the
President signed the fiscal year 1994 foreign aid bill that included
$2.5 billion for the NIS. 


--------------------
\35 "A Strategic Alliance with Russian Reform," Prepared Remarks of
President William J.  Clinton to the American Society of Newspaper
Editors (Annapolis, MD:  Apr.  1, 1993). 


      ALTERNATIVES TO GSM-102
      EXPORT CREDIT GUARANTEES
-------------------------------------------------------- Chapter 5:8.1

There are alternatives to the GSM-102 program for helping to finance
continued U.S.  agricultural exports to successor states to the FSU. 
Examples include the GSM-103 program and various food aid programs. 
Since the latter include substantial concessionality and at times
total grant aid, they would entail higher budgetary outlays. 

As discussed in chapter 1, the GSM-103 export credit guarantee
program is similar to the GSM-102 program but provides terms of
credit whereby the repayment period can range up to 10 years.  An
advantage of this program is that it would help recipient successor
states to finance food imports without adding to their difficult
liquidity problems during the next few years, since repayments can be
stretched out over a decade.  However, GSM-103 is not an appropriate
program to use if the successor states are uncreditworthy and is
questionable if they are high risk, since longer repayment terms may
also increase risk.  A limitation of the program is that far fewer
dollars have been authorized for GSM-103 guarantees than for GSM-102
guarantees (see table 1.1).  Under the 1990 Farm Bill, CCC is
required to make available at least $5 billion for each of fiscal
years 1991 through 1995, whereas the minimum level stipulated for
GSM-103 assistance is only $500 million. 

USDA has used several food aid programs to provide food assistance to
the successor states during the past few years.  These include Public
Law 480, title I, the section 416(b) program of the Agricultural Act
of 1949 (P.L.  81-439), and the Food for Progress program of the Food
Security Act of 1985 (P.L.  99-198). 

Title I of the Food for Peace program (P.L.  480) is a concessional
sales program to promote exports of agricultural commodities from the
United States and to foster economic development in recipient
countries.  The program requires annual appropriations and thus has a
direct impact on federal spending.  Food for Peace provides export
financing over payment periods of 10 to 30 years, grace periods on
payments of principal of up to 7 years, and low interest rates. 
Eligible countries are developing countries experiencing a shortage
of foreign exchange earnings and having difficulty meeting all of
their food needs through commercial channels.  According to USDA,
program allocations take into account changing economic and foreign
policy situations, market development opportunities, existence of
adequate storage facilities, and possible disincentives to local
production. 

Section 416(b) of the Agricultural Act of 1949 authorizes donations
of uncommitted CCC stocks to assist needy people overseas.  Food for
Progress is a food aid program that is carried out using funds or
commodities made available through Public Law 480, title I, or the
section 416(b) program.  Food for Progress is generally administered
on grant terms.  It provides commodities to developing countries and
emerging democracies to encourage democracy and private enterprise,
including agricultural reform. 

Table 5.13 provides figures on the value of GSM-102 credit guarantee
and food aid assistance to the FSU/successor states during fiscal
year 1991 through April of fiscal year 1994.  As the table shows,
GSM-102 credit guarantees accounted for all of the assistance
provided during fiscal year 1991 and most of the assistance made
available during fiscal year 1992.  As a result of the suspension of
the GSM-102 program in the fourth quarter of 1992, food aid became
the dominant form of agricultural assistance in fiscal year 1993. 
The combined total of GSM-102 and food aid assistance in fiscal year
1993 was slightly more than all GSM-102 assistance provided during
fiscal year 1991 but represented only about two-thirds of the
combined value of the GSM-102 and food aid assistance made available
during fiscal year 1992.  As the table shows, from fiscal year 1991
through April of fiscal year 1994, GSM-102 credit-guaranteed
assistance was about $5.1 billion, while food aid assistance equaled
about $2 billion.  Total agricultural assistance made available in
fiscal year 1994 (through April) was a small fraction of that
provided during each of the 3 previous fiscal years. 



                                    Table 5.13
                     
                     U.S. Agricultural Assistance to the FSU/
                      Successor States, Fiscal Years 1991-94

                              (Dollars in millions)


                                                             1994 (As of  Total\
Type of assistance                   1991    1992    1993         April)       a
---------------------------------  ------  ------  ------  -------------  ------
GSM-102 credit guarantees          $1,915  $2,590    $523          $40\b  $5,068
Food aid, total\c                       0     354   1,425            244   2,023
P.L. 480, title I                       0      60      66             49     175
Section 416(b)                          0     125     301             73     499
Food for Progress                       0      72     958            107   1,137
DOD excess stock donations              0      62      42              0     104
Private donations                       0      35      58             15     108
Technical assistance\d                  0      49      49             44     142
================================================================================
Total agricultural assistance      $1,915  $2,993  $1,997           $328  $7,233
Agricultural assistance as            98%     71%     36%             6%      NA
 percent of total U.S. assistance
--------------------------------------------------------------------------------
Legend
NA = Not available

\a Totals in this column calculated by GAO. 

\b Does not include $20 million unoperational credit for Ukraine. 

\c Programmed assistance. 

\d Estimate based on data from USDA and the Agency for International
Development. 

Source:  Former USSR:  Situation and Outlook Series, USDA, ERS
(Washington, D.C.:  May 1994). 


      QUESTIONS ABOUT THE NEED FOR
      MORE CREDIT GUARANTEES
      AND/OR FOOD AID
-------------------------------------------------------- Chapter 5:8.2

Questions exist about the need for and value of additional credit
guarantees and food aid for the FSU successor states.  For example,
FSU agricultural imports were down considerably in 1993 and,
according to USDA, there generally is not a food shortage problem in
the area.\36 According to USDA, economic reforms have begun to have
some positive effects, and as they take further hold, the successor
states are not likely to continue importing at their former high
levels.  At the same time, credits and credit guarantees have
unintentionally impeded the reform process by increasing the
successor states' external debt burden and perpetuating state control
of agricultural distribution. 

According to USDA, the successor states' demand for agricultural
imports diminished by 27 percent in 1993 compared to 1992 levels.  In
commenting on a draft of this report, USDA said that Russian
agricultural imports are down sharply largely due to a reduction in
demand, particularly of grain, which makes up the bulk of imports. 
The drop in FSU agricultural imports is expected to continue and,
according to USDA, is a sign that economic reforms are working, at
least to some degree.  USDA noted that high levels of Soviet
agricultural imports in the 1980s were used to prop up an
overexpanded and inefficient livestock sector.  Declines in that
sector have freed up domestic grain supplies (production of which has
remained steady with the exception of 1991's drought-affected crop)
and lowered the FSU demand for imports.  In addition, USDA said,
price liberalization in several republics has led to lower waste,
increased incentives, and more rational use of inputs. 

In commenting on a draft of our report, USDA indicated that food
assistance has adversely affected reform in the FSU.  USDA said that
although widespread dislocation in the FSU food supply never
occurred, the West continued to provide assistance (credits and food
aid) to the FSU, which accepted it to the likely detriment of
economic reforms (increased debt and continued state control of
agricultural marketing). 

According to a USDA analysis,\37 the high level of FSU grain imports
in recent years--sustained by credits, credit guarantees, and food
donations--allowed FSU authorities to delay increases in farm prices
and to maintain the centralized grain distribution and marketing
system to a large degree.  For example, the average price of wheat
imported by the FSU in 1992-93 was $125 a ton (excluding freight),
while Russian farmers received less than $40 a ton.  The state
provided massive subsidies that lowered the price of the imported
grain relative to domestic farm prices.  Thus, instead of paying
Russian farmers higher prices, which would have improved farm
incomes, increased farm sales, and reduced waste,\38 the state chose
instead to purchase large amounts of foreign grain.  When commercial
financing was no longer available, the state requested concessional
loans and donations to help maintain these imports.  Obtaining
imports on concessional terms, which meant deferring immediate
repayment, was easier for state planners than allowing market forces
to set domestic grain prices.  The commercial credits and credit
guarantees also adversely affected the reform process, because scarce
hard currency needed to support domestic reform was instead required
to service the increased external debt.\39

According to the USDA analysis, fewer credits and credit guarantees
are likely to be provided in the future because of increased western
concerns about FSU creditworthiness, particularly Russia's, and
expectations of decreased FSU demand for imports.  USDA also believes
that concessional financing and humanitarian assistance may still be
necessary for some of the successor states in the short- to
medium-term future. 


--------------------
\36 Food supply crises that were predicted by the popular press in
the first years of post-Soviet reform never occurred except in those
areas affected by civil war (the Transcaucasus and Tajikistan). 

\37 "New Direction for FSU Ag Assistance," Agricultural Outlook
(Washington, D.C.:  USDA/ERS, Mar.  1994). 

\38 For example, if farmers were offered higher prices, they would be
willing to sell more, and fewer commodities would be left to rot in
the fields. 

\39 See also GAO/GGD-94-17. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 5:9

The GSM statute prohibits USDA from extending credit guarantees to
any country the Secretary determines cannot service the debt. 
However, the statute does not provide any guidance as to what is an
acceptable level of risk in evaluating whether countries can
adequately service proposed GSM debt.  In addition, the statute does
not limit the amount of GSM guarantees that can be provided each year
to very risky countries--either individually or in aggregate. 
Consequently, USDA can allocate large amounts of guarantees to
high-risk countries and even to countries that are judged not
creditworthy, making the GSM-102 portfolio subject to a potentially
high rate of default.  CCC fees that included a risk-based component
could help to offset the cost of loan defaults.  However, under the
1990 Farm Bill, CCC is currently restricted from charging an
origination fee for any GSM-102 credit guarantee in excess of an
amount equal to 1 percent of the amount of credit extended under the
transaction.  Given this restriction, CCC would be considerably
limited in the size of the fee that it could charge to take account
of country risk should it decide to do so. 

Most, if not all, of the FSU successor states are not creditworthy
and all should be considered at least high risk from a
creditworthiness perspective.  The GSM-102 portfolio is exposed to a
high level of risk of default because a large portion of the
portfolio includes FSU debt and because of Russia's lack of
creditworthiness.  Since the GSM-102 program provides financing with
terms to only 3 years, providing additional GSM-102 guarantees to the
successor states could further add to their liquidity problems during
the financing period.  The GSM-103 program could help successor
states to finance food imports without adding to their difficult
liquidity problems during the next few years, since repayments can be
stretched out over 10 years.  However, GSM-103 is not a good program
to use if the successor states are uncreditworthy and is questionable
if they are high risk, since longer repayment terms may also increase
risk.  Consequently, both GSM programs may not be an appropriate
vehicle at this time for financing additional U.S.  agricultural
exports to Russia or other successor states.  Alternatives to the GSM
programs include various food aid programs.  Of course, the latter
include substantial concessionality and at times total grant aid, and
thus would result in higher budgetary outlays. 

There may be important economic and national security reasons for the
United States to further assist the financing of food exports to
Russia and one or more successor states.  For example, if
circumstances develop where the Russian government cannot obtain the
hard currency to pay for food imports needed to balance Russia's food
needs, the country's political stability could be threatened.  The
latter could disrupt Russia's progress toward establishing democratic
institutions and a free market economy and, in turn, significantly
affect U.S.  defense expenditures. 


   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
--------------------------------------------------------- Chapter 5:10

If Congress concludes that Russia or other successor states are too
risky to receive additional GSM-102 credit guarantees, and if
Congress concludes that continued agricultural exports to the states
serve important U.S.  economic and national security interests,
Congress may wish to consider authorizing additional foreign aid to
finance the sale of the food.  Such additional authorization of
foreign aid to finance food exports to the states could then be
weighed against other priorities for U.S.  foreign economic
assistance. 

To reduce future exposure of the GSM-102 portfolio to default,
Congress may wish to consider limiting the total amount of credit
guarantees that can be issued each year to high-risk countries and
the amount that can be provided to any single high-risk country.  In
addition, Congress may wish to consider (1) amending the statutory
provision that precludes the Commodity Credit Corporation from
charging a fee in excess of 1 percent of the amount of the credit
guarantee and (2) requiring CCC to include a risk-based charge as
part of its overall fee for GSM credit guarantees. 


AGENCY COMMENTS AND OUR EVALUATION
============================================================ Chapter 6

We requested comments on a draft of this report from USDA.  It
provided general comments that are reproduced in appendix III.  Most
of these comments are discussed in this chapter; some are addressed
directly in other chapters of this report, as indicated in marginal
references.  USDA also provided a separate set of technical and
editorial comments that were incorporated into the previous chapters
where appropriate. 


   OVERALL COMMENTS
---------------------------------------------------------- Chapter 6:1

Our draft report was reviewed by a number of offices in USDA that
concluded the draft was well researched and presented.  According to
USDA, the report accurately presented USDA source materials, the
GSM-102/103 decisionmaking process, and the interviews we conducted
pursuant to the investigation. 

USDA expressed principal disagreements with our methodology for
assessing the costs and benefits of the GSM-102 credit guarantees
provided to the FSU and its successor states, particularly our use of
the secondary market as a means of estimating losses.  USDA also
disagreed with our draft conclusion that all of the 15 successor
states were not creditworthy. 


   USE OF THE SECONDARY MARKET TO
   ESTIMATE DEFAULT COSTS
---------------------------------------------------------- Chapter 6:2

As discussed in chapter 5, we considered secondary market valuations
of FSU loans in evaluating the creditworthiness of the FSU and its
successor states, and we used the secondary market's valuation of FSU
loans to estimate expected losses on the value of outstanding GSM-102
loans to the FSU.  According to USDA, there are too few participants
in the secondary market and they can easily manipulate the market. 
Thus, USDA said, none of its reviewing offices believe the secondary
market is a reliable indicator of the value of FSU debt paper.  In
addition, USDA said that the attributes of debt traded in the
secondary market might be materially different from the GSM debt.  We
disagree with USDA on these points. 

As discussed in a previous GAO report,\1 we concluded that the
secondary market provides the best available risk-based valuations of
sovereign debt of countries that do not have well developed financial
systems.  More specifically, we found that the secondary market
provides the same characteristics of many functioning securities
markets.  Generally speaking, the market is (1) self-correcting; (2)
appears to have minimal outside forces operating on it other than the
risk-reward evaluation by a large number of participants--banks,
insurance companies, pension funds, and private investors; (3) has
substantial volume and appears to be efficient; (4) and has a wide
variety of instruments with varying lengths of maturity and other
characteristics. 

USDA seems to ignore the emergence of the secondary market as a major
financial market.\2 According to a World Bank 1992 study, the total
volume of secondary market trading rose from an estimated $4 billion
in 1985 to $100 billion in 1990.  The bank noted that as a result of
improved market efficiencies, secondary market prices were
increasingly used as indicators of a country's creditworthiness and
as benchmarks in debt reductions/restructuring packages.\3 According
to more recent studies, secondary market trading increased enormously
in 1992 and 1993, reaching volumes of $773.7 billion and $1.9
trillion, respectively.\4 As concerns FSU or Russian paper, it has
become one of the more popularly traded assets in the secondary
market.  According to the Emerging Markets Traders Association,
Russian debt ranked eighth on trading volume out of 42 countries for
which the group reported data for 1993.  Trading volume in Russian
debt increased more than 35-fold--from $678 million in 1992 to $24.7
billion in 1993. 

Although we feel confident about our use of secondary market data to
estimate expected losses on the value of outstanding GSM-102 loans to
the FSU, we developed a second method for estimating such losses
after receiving USDA's comments on our draft report.\5 As discussed
in chapter 5, we used Euromoney country risk ratings to estimate the
risk of default and, in turn, the expected cost of GSM-102 loans to
the FSU and Russia as of June 1994.  The results were very similar to
the results obtained from our use of the secondary market prices and,
thus, increase our confidence in the secondary market method. 

As noted previously, USDA also commented that the attributes of
secondary market debt may be materially different from the GSM debt. 
USDA did not cite any examples of how the debt might be materially
different or explain how such differences might affect the use of
secondary market prices to reflect the risk of default on GSM-102
loans.  GSM debt is different in the sense that the U.S.  government
guarantees most, if not all, of the principal in the event that the
borrower defaults on its loans.  Since lending banks are guaranteed
that USDA will repay at least 98 percent of defaulted GSM-102 loans,
lenders to Russia would presumably have little reason to trade the
debt on the secondary market when Russia defaults on such debt. 
However, this characteristic of GSM-102 loans does not reflect on the
likelihood of whether Russia will default on its payoff of GSM-102
debt. 


--------------------
\1 See GAO/GGD-93-45.  The report used secondary market data to
estimate the actual value of GSM-102/103 guaranteed loans for all
outstanding GSM debt, including accounts receivable from loan
guarantee payouts on delinquent GSM-102/103 loans. 

\2 For example, see Kevin Muehring, "Emerging-markets Debt Comes of
Age," Institutional Investor (April 1994). 

\3 World Debt Tables 1992-93. 

\4 1992 Trading Volume Survey and 1993 Trading Volume Survey. 

\5 Secondary market prices for FSU loans was only one of a variety of
types of information and analysis that we used to assess
creditworthiness more generally.  As discussed in chapter 5, both
secondary market prices and other information we analyzed point to a
lack of creditworthiness for the FSU. 


   CREDITWORTHINESS
---------------------------------------------------------- Chapter 6:3

In its comments on our draft report, USDA said that it disagreed with
our conclusion that all of the FSU successor states are not
creditworthy.  USDA indicated that between August 1993 and February
1994 it had found Ukraine, Uzbekistan, and Turkmenistan to be
creditworthy; it noted that each of these states had been found
qualified to receive modest amounts of GSM-102 credits during that
period.  (USDA also said that each program was driven by market
development objectives.) However, in May 1994 USDA officials advised
us that the office responsible for preparing creditworthy assessments
had rated Ukraine as not creditworthy during the previous year and
still considered Ukraine as uncreditworthy.  Thus, USDA had made
credit guarantees available to Ukraine in fiscal year 1994 even
though its own analysis indicated the country was uncreditworthy.\6

In addition to Ukraine, other successor states identified by USDA as
still not creditworthy in May 1994 were Russia, Armenia, Azerbaijan,
Belarus, Georgia, Kyrgyzstan, Moldova, and Tajikistan.  Thus, USDA
classified 9 of the 15 successor states as not creditworthy. 
Creditworthy successor states at that time, according to USDA,
included the three Baltic states (Estonia, Latvia, and Lithuania) as
well as Kazakhstan, Turkmenistan, and Uzbekistan. 

Creditworthiness evaluations involve a multidimensional analysis of a
variety of factors and some subjective judgment.  As a result,
evaluations by different parties may not always fully agree.  This is
best evidenced in chapter 5, where we compare the country risk
evaluations of three different private rating services (see table
5.8).  Consequently, it is not necessarily surprising that USDA did
not agree with the conclusion in our draft report that all of the
successor states were not creditworthy.  After considering USDA's
comment, we decided to restate our conclusion as follows:  Most, if
not all, FSU successor states are not creditworthy and all should be
considered at least high risk from a creditworthiness perspective.\7

We believe our restated conclusion is well supported by the
information and analyses presented in the report, especially by the
material presented in chapters 4 and 5.  The most recent summary
information in support of our restated conclusion is found in tables
5.10 and table 5.11.  As table 5.10 shows, in March 1994 both
Euromoney and Institutional Investor rated nearly all of the FSU
successor states among the bottom one-third of all the countries they
rated on creditworthiness, and most of the rated successor states
were in the bottom quartile.  As table 5.11 shows, Euromoney's actual
risk ratings for the 15 successor states for March 1994 imply risks
of default ranging between about 66 percent (Latvia) to about 82
percent (Armenia).  We believe it is reasonable to characterize
countries that rank among the bottom one-third of all countries on
country risk and that have an implied risk of default equal to or
greater than 66 percent as being either uncreditworthy or at least
highly risky from a creditworthiness perspective.\8


--------------------
\6 As discussed in chapter 2 of this report, in October 1992 USDA
announced an allocation of $200 million in credit guarantees for
Ukraine even though USDA's risk rating at that time indicated the
country was not creditworthy.  Ukraine's lack of creditworthiness was
clearly evidenced on June 2, 1994, when it began defaulting on its
GSM-102 loans. 

\7 As discussed in chapter 5, USDA's classification scheme includes
four categories for creditworthy countries:  (1) below average risk,
(2) average risk, (3) above average risk, and (4) high risk. 

\8 As we were nearing completion of this report, we reviewed the two
raters' September 1994 country risk ratings for the successor states. 
The ratings were consistent with those they reported in March 1994. 


   ADDITIONALITY ISSUE
---------------------------------------------------------- Chapter 6:4

As discussed in chapter 2, whether and to what extent GSM-102 exports
lower domestic commodity support program costs depends importantly on
the availability of alternative markets for the exports.  This is
referred to as the "additionality" issue.  For example, if one
assumes that in the absence of the GSM-102 credit guaranteed exports
to the FSU and its successor states alternative export markets would
not exist, this is characterized as 100-percent program
additionality.  If one assumes that 75 percent of the commodities
could be exported to other countries, the program additionality would
be only 25 percent. 

In chapter 2, we raised questions about USDA's approach, which
largely relied on an assumption of 100-percent additionality.  We
expressed the view that analyses should consider a range of
additionality levels.  In commenting on our draft report, USDA
provided mixed views on this issue.  On the one hand, USDA agreed
that one should consider a range of additionalities.  In fact, USDA
cited a third estimate,\9 provided to the Secretary of Agriculture in
February 1993, in which two levels of additionality were assumed for
$2 billion in credits to the FSU--50-percent additionality and
100-percent additionality.  According to USDA, the estimate indicated
deficiency payment savings of $0.7 billion to $1.4 billion.  However,
USDA further assumed a loan concessionality of 60 percent, or $1.2
billion, to cover loan defaults, freight costs, EEP bonus payments,
and other unspecified factors.  USDA estimated that the net budget
costs of $2 billion in credits (after subtracting estimated
deficiency payment savings from the loan concessionality cost) would
vary between a cost of $500 million to a savings of $200 million. 
Although USDA's comments cited a third estimate that included a
50-percent additionality case, USDA went on to say that an assumption
of 100-percent additionality with regard to the FSU and its successor
states seemed reasonable.  In support of the latter view, USDA said
it is likely that without the GSM-102 coverage the FSU would not have
been able to purchase substantial quantities of U.S.  commodities. 
This is illustrated, USDA said, by the sharp decline in U.S.  exports
to the FSU after it was suspended from the program.  In addition,
USDA said there were few alternative opportunities for the use of the
credit guarantees in other countries. 

In chapter 2, we questioned USDA's assumption that alternative export
markets would not be available on the grounds that special features
of the GSM-102 program made available to the FSU and its successor
states should be attractive if offered to other importing nations. 
One special feature we noted was USDA coverage of 100 percent of the
value of the commodities.  However, in commenting on our draft
report, USDA indicated that it does not like and would be unlikely to
provide 100-percent coverage.  In addition, USDA said, our analysis
presumes there are creditworthy countries in the world marketplace
that are interested in participating in a large-scale GSM-102
program.  According to USDA, during fiscal years 1991 and 1992
principal markets not targeted for the GSM-102 program included
China, Cuba, Iran, Libya, and Japan.  With the exception of China and
Japan, USDA said, there were few alternative markets that could exert
the same amount of influence on U.S.  domestic prices as that exerted
by the FSU market; and both China and Japan purchased heavily from
the United States during the time period without credit guarantees. 

We do not believe that 100-percent additionality is the most
reasonable assumption.  As discussed in chapter 2, we estimated that
the combination of freight cost financing and EEP bonus payments,
alone, made the additionality attributable to the GSM program for the
FSU and its successor states in fiscal years 1991 and 1992 equal at
most to about 77 percent.  In addition, the issue of what assumed
additionality level is most appropriate does not depend simply on
whether the FSU could have purchased the U.S.  commodities without
the GSM-102 guarantees.  If the United States had not provided the
guarantees, other exporting countries might have provided credits or
credit guarantees to assist the FSU.  Doing so could have reduced
those countries' exports to third countries, enabling the United
States to increase its exports to the latter.  Even if the United
States had not provided the guarantees and other countries had not
provided additional guarantees, it is not obvious that the
100-percent additionality case should be applied.  A decline in sales
to the FSU would tend to lead to reduced prices on world markets,
which, in turn, could result in increased demand. 

We have not advocated providing 100-percent loan guarantee coverage. 
However, we believe that if one wants to consider to what extent
credit guarantees to the FSU and its successor states increased U.S. 
exports, a fair comparison should consider what would have happened
if comparable terms had been offered to other countries.  We are not
aware of any single country with a market comparable to that of the
FSU that would have been interested in GSM-102 credit guarantees. 
However, it is possible that a number of countries with smaller
markets might have been interested in credit guarantees or additional
guarantees if the terms were comparable to those extended to the FSU. 
Any guarantees or increase in guarantees provided to other countries
would, of course, further detract from the realism of a 100-percent
additionality assumption. 


--------------------
\9 As discussed in chapter 2, USDA originally provided us with
information on two estimates. 


   VIEWS ON MATTERS FOR
   CONGRESSIONAL CONSIDERATION
---------------------------------------------------------- Chapter 6:5

USDA did not express any view regarding our suggestions in chapter 5
on how Congress could reduce future exposure of the GSM-102 portfolio
to default.  A USDA official told us that it had been examining the
issue but had not yet reached any conclusions. 

USDA approved of our suggestion that if Congress concludes the United
States needs to ensure continued U.S.  agricultural exports to Russia
and/or other successor states but decides additional GSM-102
guarantees are not appropriate at this time, it may want to consider
authorizing additional foreign aid money to finance export sales. 
USDA said that ongoing agricultural exports to the FSU are essential
to the American farm community and to U.S.  geopolitical interests
and provide needed foodstuffs to a market of enormous potential. 

We agree that the American farm community may benefit from ongoing
exports to the FSU.  We also agree that broader U.S.  interests may
be served by U.S.  agricultural exports to the successor states but
do not believe that such exports automatically advance such
interests.  For example, the United States has favored economic
reforms in the FSU that promote development of a free market economy. 
Yet, as USDA itself noted in commenting on our draft report, western
assistance (credits and food aid) to the FSU has probably had a
detrimental impact on FSU economic reforms--including increased debt
and continued state control of agricultural marketing. 


ADDITIONAL INFORMATION ON
CONFLICTS AFFECTING RUSSIA AND
OTHER SUCCESSOR STATES
=========================================================== Appendix I


   AZERBAIJAN AND ARMENIA
--------------------------------------------------------- Appendix I:1

Violent conflict has raged since 1988 in Azerbaijan between Azeris,
who constitute 83 percent of the population and are mostly Shiite
Moslems, and Armenians, who equal about 6 percent of the population
and are Christian.  In early 1988, Nagorno-Karabakh, an autonomous
region that is predominantly Armenian, petitioned to become a part of
Armenia.\1 This event touched off ethnic conflict, creating an
increasing refugee problem and violence between Armenians and Azeris,
primarily in Karabakh but also elsewhere in Azerbaijan, along the
Armenia-Azerbaijan border, and in the Nakhichevan Autonomous Republic
(part of Azerbaijan but separated by Armenian territory).  According
to one recent estimate, the fighting has resulted in more than 10,000
deaths and 1.4 million refugees.  Concerns have been raised that the
conflict could widen to involve Russia and other countries.\2

Azerbaijan nullified Nagorno-Karabakh's autonomous status in November
1991.  However, in December a Karabkh referendum voted for
independence.  Azerbaijan imposed an economic embargo on Armenia that
has taken a heavy toll, since Azerbaijan was the principal supply
route into Armenia.\3 In May 1992, Armenians attained complete
control over Karabakh and cut a corridor through Azerbaijani
territory to link Karabakh to Armenia.  According to a recent
PlanEcon report, Armenian forces now control a fifth of Azerbaijan's
territory.\4

Russia has sought to mediate a peaceful outcome to the conflict.  A
cease-fire took place in May 1994, but violations have been reported. 
Several rounds of peace talks have been held, but the most difficult
issues have not been resolved.\5 According to PlanEcon, the conflict
could escalate again in 1995.\6


--------------------
\1 See Jim Nichol, Azerbaijan:  Basic Facts, Library of Congress,
Congressional Research Service Report 92-142 F (Washington, D.C.: 
Dec.  18, 1992). 

\2 See Carol Migdalovitz, Armenia-Azerbaijan Conflict, Library of
Congress, Congressional Research Service Issue Brief 92109
(Washington, D.C.:  Mar.  22, 1993 and Sept.  30, 1994). 

\3 According to PlanEcon, Armenian national income fell 10 percent in
1990 and 11 percent in 1991, largely due to disrupted transportation
links. 

\4 Review and Outlook for the Former Soviet Republics August 1994. 

\5 Armenia-Azerbaijan Conflict. 

\6 Review and Outlook for the Former Soviet Republics August 1994. 


   BALTIC STATES
--------------------------------------------------------- Appendix I:2

During 1990, the Baltic republics of Estonia, Latvia, and Lithuania
proclaimed their independence from the Soviet Union.  The Soviet
Union recognized their independence in September 1991, following the
failed August coup in Moscow.  However, a number of issues remained
unresolved.  These included, among others, Russian military and
security forces that continued to be stationed in the Baltic area;
the status of Russian and other minorities in the Baltic countries;
the disposition of Soviet assets (for example, the Soviet Union had
maintained important Soviet military installations in these countries
since the end of the Second World War); and Baltic interest in
compensation for decades of Soviet rule.\7

The Baltic countries pressed for the immediate withdrawal of former
Soviet troops.  The Russian government wanted to delay a withdrawal
because of a lack of housing in Russia for returning officers.  In
addition, it expressed concern over treatment of Russians in the
Baltic states (both Latvia and Estonia have large Russian
populations), and at times tied this issue to withdrawal of its
military forces from the area.  The troop issue was particularly
sensitive, since non-Baltic populations in the area who did not
support Baltic independence might have pressed for restoration of
Soviet/Russian power.\8

In September 1992, Russia announced it would withdraw forces from
Lithuania by August 31, 1993.  Russia completed the troop withdrawal
at that time.  Russian troops remained in Estonia and Latvia, but
they were finally withdrawn in August 1994. 


--------------------
\7 See Vita Bite, The Baltic States:  U.S.  Policy Concerns, Library
of Congress, Congressional Research Service Issue Brief 90075
(Washington, D.C.:  Mar.  23, 1993). 

\8 The Baltic States:  U.S.  Policy Concerns. 


   GEORGIA
--------------------------------------------------------- Appendix I:3

Georgia declared independence from the Soviet Union in April 1991. 
One month later, Zviad Gamsakhurdia was elected President, receiving
87 percent of the popular vote.  However, owing to repressive
policies, he was overthrown by opposition forces in January 1992,
after a brief civil war.  Following the dissolution of the Soviet
Union, Georgia refused to join the Commonwealth of Independent States
(CIS), citing its likely domination by Russia and CIS
ineffectiveness.  Russian armed forces still remain in Georgia, but
Russia has proposed to withdraw them by the end of 1995.\9

Even before Georgia's independence, two ethnic groups--South
Ossetians and Abkhazians--sought to secede from Georgia.  The former
wanted to unite with North Ossetians in neighboring Russia and become
a territorial unit within the Russian Federation.  In September 1990,
South Ossetia declared itself a sovereign republic.  In late 1990,
fighting broke out between Ossetian rebels and Georgian nationalist
guerrillas.  In early 1991, the Soviet Union deployed over 1,000
troops in South Ossetia to keep the fighting in check.  In April
1992, Russia agreed to a request of the Georgian government that it
withdraw its troops but subsequently reversed the decision.  In May
1992, the leaders of North Ossetia, an autonomous Russian republic
that borders South Ossetia in Georgia, adopted a resolution
threatening that if Russia did not help end the fighting in South
Ossetia, North Ossetia would secede from Russia and join with South
Ossetia to form a new country.  In late May 1992, North Ossetia moved
unilaterally to close off the gas pipeline traversing North Ossetia
to Georgia and blockade transportation as part of economic sanctions
against Georgia.  The action further complicated Russian foreign
relations with Georgia and even with Armenia, which depended on the
gas shipments.  A cease-fire agreement was reached in June 1992 by
Russia, Georgia, and Ossetia.  The cease-fire has been repeatedly
reextended, but the underlying issue of South Ossetia's demand to
secede from Georgia has not been resolved.\10

Abkhazians constitute about 18 percent of the population of the
Georgian republic of Abkhazia.  Although only a minority, they
declared themselves a sovereign republic in August 1990.  Substantial
and protracted armed conflict got under way in August 1992 and has
resulted in thousands of casualties and hundreds of thousands of
displaced persons.  Georgia accused the Russian military of assisting
the Abkhazians in order to boost Russian control over the Black Sea
(Abkhazia is located next to the sea).\11 A mid-May 1993 ceasefire
was repeatedly violated.  In mid-September 1993, Abkhazian forces
launched a general offensive.  Georgia's President Eduard
Shevardnadze appealed to Russia for assistance but was reluctant to
agree to Russia's sending troops to separate the combatants.  By the
end of September, Abkhazian forces had taken complete control of the
province, including the Black Sea port of Sukhumi.\12

While the Abkhazian offensive was under way, a new threat to
Georgia's integrity arose when former President Gamsakhurdia returned
from exile and led a revolt from his native province of Mingrelia to
overthrow President Shevardnadze.  In October 1993, Georgia requested
Russian military assistance.  Georgia announced that it would join
the CIS and signed agreements with Russia legalizing the indefinite
presence of Russian troops and allowing Russian use of various
airfields, ports, and railway lines.  In late October and early
November 1993, Russia provided key military support that ended most
resistance and forced Gamsakhurdia to flee the country.\13

In May 1994, Russia brokered a cease-fire between Georgia and
Abkhazia.  Under the agreement, Russian troops (formally acting as
CIS "peacekeepers") were deployed in late June in a security zone
that divides Abkhazia from Georgia proper.\14


--------------------
\9 See Jim Nichol, Georgia:  Basic Facts, Library of Congress,
Congressional Research Service Report 93-619 F (Washington, D.C.: 
June 30, 1993). 

\10 Jim Nichol, Georgia:  Basic Facts, Library of Congress,
Congressional Research Service Report 94-608 F (Washington, D.C.: 
July 28, 1994); The Russian Federation:  Will It Hold Together? 

\11 Georgia:  Basic Facts. 

\12 See Jim Nichol, Georgia in Transition:  Situation Update, Library
of Congress, Congressional Research Service Report 93-1039F
(Washington, D.C.:  Dec.  10, 1993). 

\13 See Jim Nichol, Georgia:  Basic Facts, Library of Congress,
Congressional Research Service Report 94-608 F (Washington, D.C.: 
July 28, 1994).  Georgia in Transition:  Situation Update. 

\14 Georgia:  Basic Facts. 


   MOLDOVA
--------------------------------------------------------- Appendix I:4

Moldova is populated by people of mostly Romanian origin and might
eventually become part of Romania.  On August 27, 1991, Moldavia
declared its independence from the Soviet Union and became the
Moldova Republic.  In response, the Dniestr area and the Gagauz
region, with the support of the local Russian-speaking population,
voted to secede and remain a part of the Soviet Union by forming
Soviet Socialist republics.  The area that constitutes the
Trans-Dniestr region was a part of Ukraine before 1940.  It
represents the only highly industrialized area of Moldova, and it
supplies most of the rest of the country with gas and electricity. 
The Russian and Ukrainian population feared that a merger with
Romania would make them second-class citizens in Romania.\15

An armed conflict began in March 1992 after Moldovan nationalists
stepped up a campaign to unite with Romania.  Between then and July
1992, conflict between Slav separatists in the Dniestr region and
Moldovan forces led to more than 600 deaths, thousands of wounded,
and more than 60,000 refugees.  In May 1992, the Moldovan President
charged Russia with open aggression and accused the Russian
Fourteenth Army of deploying tanks, armored vehicles, and heavy
artillery in support of Dniestr separatists.  The Moldovan Parliament
also condemned the army, characterizing it as an occupation force. 
On May 23, 1992, Moldova appealed to the United Nations for support
against what it called Russian-led aggression.  In June 1992, the
Russian Minister of Defense declared that Russia would never abandon
Russians in the Dniestr region.  The Russian Foreign Minister
suggested that the region could potentially be included in Russia,
even though the area has no border with Russia.  However, relations
between the two countries improved following visits by the Moldovan
President to Moscow in June and July 1992.  At that time, agreements
were reached to try to settle the conflict peacefully.\16 A July 1992
cease-fire has been upheld, but a peace agreement has not yet been
concluded.  Important differences remain about the degree of autonomy
to be given to the Dniestr region.\17

In southern Moldova, the Gagauz (a minority of Turkish origin, about
153,000 people) negotiated with Moldovan authorities about the future
of the region.  (Both the Gagauz and the Dniestr areas are physically
separate from each other and from Russia.) On July 28, 1994, the
Moldovan Parliament adopted a law, negotiated with Gagauz officials,
establishing a national-territorial autonomous unit for the Gagauz. 
The region will have its own legislature and executive and will be
entitled to secede from Moldova if the latter unites with Romania.\18


--------------------
\15 See Sergiu Verona, Moldovan Crisis, Library of Congress,
Congressional Research Service Issue Brief 92100 (Washington, D.C.: 
July 23, 1992). 

\16 Moldovan Crisis. 

\17 Sergiu Verona, Moldova Republic:  Basic Facts, Library of
Congress, Congressional Research Service Report 94-656 F (Washington,
D.C.:  Aug.  12, 1994). 

\18 Moldova Republic:  Basic Facts. 


   TAJIKISTAN
--------------------------------------------------------- Appendix I:5

Tajikistan has been embroiled in a civil war between former
Communists on one side and democratic and Islamic fundamentalist
groups on the other.  According to a September 1994 estimate, the
conflict has created over 350,000 refugees, about 60,000 to 100,000
of whom have fled to neighboring Afghanistan.  Iran and Afghanistan
are said to have aided the Islamic fundamentalists and Russia and
Uzbekistan the old guard Communist forces.\19

Following the failed August 1991 coup in Moscow, the chief of the
Tajik Communist Party was forced to resign; he had supported the
coup.  Under pressure from the democratic and Islamic opposition, the
Tajik legislature declared the republic's independence in September
1991 and suspended the party's activities.  The latter action
prompted a backlash from former Communist deputies, who reconstituted
the party in the parliament and elected Rakhmon Nabiyev as President. 
He had headed the Tajik Communist Party until 1985.  In November
1991, Nabiyev won a popular election for the presidency.  In April
and May 1992, opposition forces demanded Nabiyev's resignation and
the election of a new legislature.  After gun battles, in which the
opposition seized most of the capital, Nabiyev agreed to form a
coalition government.  In September 1992, the opposition stormed the
presidential palace and forced Nabiyev to resign.  A new government
was formed in which the nationalist and Islamic opposition received
key posts.  However, in October 1992, supporters of the former
Communists pushed into the capital and installed a new government.\20
An offensive against retreating opposition forces reportedly left
20,000 to 40,000 dead.\21

During 1992, Russia sent progressively more forces into Tajikistan,
largely at the request of Nabiyev and the urging of other Central
Asian leaders, to keep order and protect already committed forces and
ethnic Russians.  Reports persisted that Russian troops had sided
with the former Communists in overturning the brief opposition
regime.  There were also reports that Uzbekistan had intervened on
behalf of the former Communists with helicopter gunships and
aircraft.  The Uzbek President closed his country's border with
Tajikistan and launched a major crackdown against dissent in
Uzbekistan. 

Since the military victory of the former Communists in the winter of
1992-93, opposition forces have regrouped in the mountainous regions
of Tajikistan and Afghanistan, mounting an insurgency effort against
the Tajik government.  They have also led attacks on border military
posts, attacking Russian military officers and border guards. 
According to a CRS report, some analysts fear that the involvement of
outside powers threatens to provoke a wider regional war. 
Reportedly, Russia is concerned about the spread of Islamic
fundamentalism along the Central Asia periphery, and Russian and
Uzbek officials have pressured the Tajik government to seek a
democratic solution to the conflict.\22


--------------------
\19 Kenneth Katzman, Tajikistan:  Basic Facts, Library of Congress,
Congressional Research Service Report 94-697 F (Washington, D.C.: 
Sept.  2, 1994). 

\20 Kenneth Katzman, Tajikistan, Library of Congress, Congressional
Research Service Report 93-305 F (Washington, D.C.:  Mar.  10, 1993). 

\21 Tajikistan. 

\22 Tajikistan:  Basic Facts. 


   UKRAINE
--------------------------------------------------------- Appendix I:6

Ukraine, the second largest of the former Soviet republics in terms
of population and size of the economy, has had acrimonious disputes
with Russia over the division of FSU property, foreign debt, nuclear
weapons, and military forces.  In addition, Crimea, which was part of
Russia until 1954, has tried to assert its independence from Ukraine. 
Many Russians feel that Crimea rightfully belongs to Russia, and some
influential Russian officials have advocated raising a territorial
claim.  Energy supplies have also been a divisive issue.  Russia,
which supplies most of Ukraine's oil, has increased fuel prices
substantially and plans to bring them eventually to world market
levels.  In January 1993, Russia said it could guarantee to supply
less than half of Ukraine's oil needs for 1993.  In February, the
Russian Deputy Prime Minister said Russia would charge world market
prices for gas and oil unless Ukraine made concessions to Russia in
negotiations over the distribution of the FSU's debts and assets and
on the costs of maintaining the Black Sea fleet.  In response,
Ukrainian officials said they would charge world market prices for
use of the gas and oil pipelines that supply almost all of Russia's
oil and gas exports to Western Europe.\23


--------------------
\23 Steven Woehrel, Ukraine, Library of Congress, Congressional
Research Service Issue Brief 92072 (Washington, D.C.:  Apr.  7,
1993). 


   RUSSIA, NORTH OSSETIA, AND
   CHECHEN-INGUSHETIA
--------------------------------------------------------- Appendix I:7

A few ethnic conflicts in the Caucasus region of the FSU and Russia
have been associated with separatist movements, violence, and the use
of armed force by the government. 

In October 1991, 2 months before the dissolution of the Soviet Union,
a Chechen nationalist movement, led by Major General Dzhakhar
Dudayev, overthrew the existing government in the Chechen-Ingush
Autonomous Republic.  Dudayev declared the republic's independence
and was elected president by the republic's voters.  Subsequently,
President Yeltsin declared a state of emergency and deployed Soviet
Internal Ministry police troops in the republic.  However, the troops
were surrounded and disarmed by Chechen militiamen and subsequently
withdrawn.  In March 1992, the Chechen parliament adopted a
constitution that declared the republic's independence, and in
mid-1992, Ingushetia separated from Chechnya.  Negotiations between
Chechen and Russian officials focused on Chechnya's demand for
complete independence.\24

The Russian parliament decided to form an Ingush republic but did not
fully implement its decision.  For example, the republic's borders
were not demarcated (including borders with the newly proclaimed
republic of Chechnya) and a capital was not chosen.  In late October
1992, fighting broke out in North Ossetia.  The fighting was between
Ossetians and Ingush who lived in North Ossetia and the neighboring
Russian region of Ingushetia and Chechnya.  On October 27, armed
Ingushes declared that North Ossetian areas with a high concentration
of ethnic Ingushes were part of the Ingush Republic and demanded that
Russian interior troops be withdrawn from North Ossetia.  (Parts of
North Ossetia and the Chechen-Ingush Republic had existed within an
autonomous Ingush province that existed until its people were
deported from the region in 1944.)

On October 31, 1992, Russia's Deputy Defense Minister, an official of
the Russian Ministry of Internal Affairs, and 3,000 special purpose
militia flew into North Ossetia's capital.  The troops were ordered
to separate the warring sides and to prevent armed forces from
entering North Ossetia from Ingushetiya and South Ossetia.  Shortly
thereafter, rebels were reported to have taken hostage 80 Russian
Interior Ministry soldiers.  In early November 1992, the Russian
President declared a state of emergency in both North Ossetia and
Ingushetia.  He warned that the warring nationalists were waging a
direct attack against Russia's constitutional system, its security,
and territorial integrity.  Ingush and Ossetian negotiators agreed to
a cease-fire and to allow Russian paratroopers and Interior Ministry
forces to set up a buffer zone between the opposing forces. 

During 1994, Russia hardened its stance against Chechnya's demand for
independence and sponsored clandestine armed Chechen opposition to
Chechen President Dudayev.  In late November, Dudayev's forces
captured several Russian soldiers, and President Yeltsin demanded
that the Chechens disarm or face a forced state of emergency.  When
Dudayev's forces refused to comply, President Yeltsin issued an edict
on December 9, 1994, authorizing the government to use all means
available to the state to disarm armed groupings on the territory of
the Chechen Republic and in the area of the Ossetian-Ingush conflict
and to restore consitutional order.  On December 10, Russian military
and police forces numbering up to 40,000 entered Chechnya and began
to move on the capital, Grozny.  On December 11, President Yeltsin
issued a statement that the government's action was prompted by a
threat to Russia's integrity, to the security of her citizens, both
inside and outside Chechnya, and by the possibility of economic and
political destablization.  The Russian forces met substantial Chechen
resistance.  Massive Russian bombardment of Grozny began after
December 21 and by January 4, 1995, some sections of the city were
reportedly occupied by Russian troops.  The conflict has reportedly
resulted in thousands of military and civilian deaths and
injuries.\25

Many Russian legislators have condemned the Russian military assault
and deemed it unconstitutional since the parliament did not approve a
state of emergency.  Several high-ranking Russian military officials
have also opposed the assault, and Russian polls and surveys
reportedly also indicate widespread opposition by the Russian people. 
Concerns have been raised within and outside Russia that the conflict
could (1) evolve into a guerilla war in the Caucasus region,
accompanied by Chechen terrorism in Russian cities; and (2) seriously
and adversely affect Russia's transition to democracy and a market
economy.  War costs are expected to add to Russia's budget deficit
and inflation and could adversely affect international financial
support for Russia's efforts to stabilize and reform its economy.\26


--------------------
\24 The Russian Federation:  Will It Hold Together?  Jim Nichol,
Chechnya Confrontation, Library of Congress, Congressional Research
Service Report 95-79 F (Washington, D.C.:  January 6, 1995). 

\25 Regarding developments in 1994 and early 1995, see Chechnya
Confrontation; and "Troops Enter Chechnya to `Restore Order,'" Moscow
Itar-Tass World Service (Dec.  11, 1994), as reported by the Foreign
Broadcast Information Service. 

\26 Chechnya Confrontation; Center for Post-Soviet Studies,
"Reactions to the Events in Chechnya," Focus (Chevy Chase, MD: 
December 1994). 


DEBT BURDEN OF COUNTRIES COMPARED
WITH PAYMENT DELAYS, IMF
ARRANGEMENTS, AND DEBT RELIEF
AGREEMENTS
========================================================== Appendix II


             Level of                  IMF
             debt                      arrangement
             burden,      Arrears in   s as of      Commercial
Country      1989-91      1991         August 1992  debt         Official debt
-----------  -----------  -----------  -----------  -----------  ---------------
Angola       Moderate     ï¿½                                      ï¿½

Antigua &    Low          ï¿½
Barbuda

Argentina    Severe       ï¿½            E. standby   ï¿½            ï¿½

Bangladesh   Moderate                  E.
                                       structural
                                       adj.

Barbados     NR                        Standby

Benin        Moderate     ï¿½                                      ï¿½

Bolivia      Severe       ï¿½            E.           ï¿½            ï¿½
                                       structural
                                       adj

Brazil       Severe                    Standby      ï¿½            ï¿½

Bulgaria     Severe       ï¿½            Standby                   ï¿½

Burkina      Low          ï¿½            Structural                ï¿½
Faso                                   adj.

Burma        Severe       ï¿½
(Myanmar)

Burundi      Severe                    E.
                                       structural
                                       adj.

Cameroon     Moderate     ï¿½            Standby                   ï¿½

Central      Moderate     ï¿½                                      ï¿½
African
Rep.

Chad         Low          ï¿½                                      ï¿½

Chile        Moderate                               ï¿½            ï¿½

Colombia     Moderate                               ï¿½

Congo        Severe       ï¿½                         ï¿½            ï¿½

Costa Rica   Moderate     ï¿½            Standby      ï¿½            ï¿½

Cï¿½te         Severe       ï¿½            Standby      ï¿½            ï¿½
d'Ivoire

Cuba         Severe       NR                        ï¿½            ï¿½

Czechoslova  Low                       Standby
kia\a

Dominican    Moderate     ï¿½            Standby      ï¿½            ï¿½
Republic

Ecuador      Severe       ï¿½            Standby      ï¿½            ï¿½

Egypt        Severe       ï¿½            Standby                   ï¿½

El Salvador  Moderate                  Standby                   ï¿½

Ethiopia     Severe       ï¿½

Gabon        Moderate     ï¿½            Standby      ï¿½            ï¿½

Gambia       Low                                    ï¿½            ï¿½

Grenada      Low          ï¿½

Guatemala    Moderate     ï¿½

Guinea       Severe       ï¿½            E.           ï¿½            ï¿½
                                       structural
                                       adj.

Guinea       Severe       ï¿½                                      ï¿½
Bissau

Guyana       Severe       ï¿½            E.           ï¿½            ï¿½
                                       structural
                                       adj.

Haiti        Low          ï¿½

Honduras     Severe       ï¿½                         ï¿½            ï¿½

Hungary      Moderate                  E. standby

India        Moderate                  Standby

Jamaica      Moderate     ï¿½            Standby      ï¿½            ï¿½

Jordan       Moderate                  Standby      ï¿½            ï¿½

Kenya        Severe                    E.
                                       structural
                                       adj.

Korea, DPR   Low                                    ï¿½

Lesotho      Low                       E.
                                       structural
                                       adj.

Liberia      Severe       ï¿½                         ï¿½            ï¿½

Madagascar   Severe                                 ï¿½            ï¿½

Malawi       Severe                    E.           ï¿½            ï¿½
                                       structural
                                       adj.

Mali         Moderate                                            ï¿½

Mauritania   Severe                                              ï¿½

Mexico       Severe                    E. standby   ï¿½            ï¿½

Mongolia     Severe       NR           Standby

Morocco      Severe                    Standby      ï¿½            ï¿½

Mozambique   Severe                    E.           ï¿½            ï¿½
                                       structural
                                       adj.

Nicaragua    Severe       ï¿½            Standby      ï¿½

Niger        Severe                                 ï¿½            ï¿½

Nigeria      Severe       ï¿½                         ï¿½            ï¿½

Pakistan     Moderate                                            ï¿½

Panama       Low          ï¿½            Standby      ï¿½            ï¿½

Papua New    Low                       Standby
Guinea

Paraguay     Low          ï¿½

Peru         Severe       ï¿½                         ï¿½            ï¿½

Philippines  Moderate                  Standby      ï¿½            ï¿½

Poland       Severe       ï¿½            E. standby   ï¿½            ï¿½

Romania      Low                       Standby      ï¿½            ï¿½

Rwanda       Moderate                  Structural
                                       adj.

Sao Tomï¿½ &   Severe       ï¿½
Principe

Senegal      Moderate                               ï¿½            ï¿½

Sierra       Severe       ï¿½                         ï¿½            ï¿½
Leone

Somalia      Severe       ï¿½                                      ï¿½

South        Low          ï¿½
Africa

Sri Lanka    Moderate                  E.
                                       structural
                                       adj.

St. Lucia    Low          ï¿½

Sudan        Severe       ï¿½                         ï¿½            ï¿½

Suriname     Low          ï¿½

Syria        Severe       ï¿½

Tanzania     Severe       ï¿½            E.                        ï¿½
                                       structural
                                       adj.

Togo         Moderate                  E.           ï¿½            ï¿½
                                       structural
                                       adj.

Trinidad &   Low                                    ï¿½            ï¿½
Tobago

Turkey       Moderate                               ï¿½            ï¿½

Uganda       Severe       ï¿½            E.                        ï¿½
                                       structural
                                       adj.

Uruguay      Moderate                               ï¿½

Venezuela    Severe                    E. standby   ï¿½

Vietnam      Severe       ï¿½

Zaire        Severe       ï¿½                         ï¿½            ï¿½

Zambia       Severe       ï¿½                         ï¿½            ï¿½

Zimbabwe     Low                       E. standby
--------------------------------------------------------------------------------
Legend:  IMF arrangements:
E.  standby = Extended standby arrangements
Structural adj.  = Structural Adjustment Facility
E.  structural adj.= Enhanced Structural Adjustment Facility
NR = Not reported

Note:  Blank spaces indicate none were reported. 

\a In 1992 Czechoslovakia divided into two independent states, the
Czech Republic and Slovakia. 

Sources:  Debt burden and debt relief arrangements data are from
World Debt Tables 1991-92 and 1992-93, The World Bank.  Debt burden
level is based on the classification method reported in the 1991-92
edition.  Arrears are from Exchange Arrangements and Exchange
Restrictions, Annual Report, International Monetary Fund, 1991.  IMF
arrangements data are from International Financial Statistics, IMF,
October 1992. 




(See figure in printed edition.)Appendix III
COMMENTS FROM THE DEPARTMENT OF
AGRICULTURE
========================================================== Appendix II



(See figure in printed edition.)

See pp.  146-147. 



(See figure in printed edition.)

140-141, 149-150. 

147-149. 



(See figure in printed edition.)

147-149. 

and pp.  147-148. 

and 4. 



(See figure in printed edition.)

See pp.  148-149. 

See pp.  75-78 and 80. 

See pp.  149 and 150. 



   GAO COMMENTS
-------------------------------------------------------- Appendix II:1

The following GAO comments on the Department of Agriculture's letter
dated February 25, 1994, supplement those that appear in the text of
the report. 

1.  Many of USDA's comments concern a statistical model that we
developed and presented in our draft report that was provided to USDA
for comment.  The model analyzed the impact of GSM-102 exports to the
FSU/successor states on U.S.  commodity support programs.  On the
basis of USDA's comments, we found that a technical mistake had been
made in applying the model's equations.  The effect of the mistake
was to underestimate the impact on the costs of commodity support
programs.  In addition, USDA criticized the model for not including
other variables that might be relevant to the issue and for not using
other more sophisticated models of the agricultural sector to
validate our results.  Neither the model nor the results that were
discussed in our draft report are presented in this report. 
Nonetheless, we have reproduced USDA's comments and briefly address
some of them in this appendix. 

2.  The two estimates that USDA originally provided us did not fully
consider EEP bonus payments and ignored freight costs and possible
loan default costs.  USDA's third estimate, provided to us as part of
its comments, is reported in chapter 6. 

3.  In discussing our model that was presented in the draft report
provided to USDA for comment, we noted that USDA had not provided us
with its methodology for analyzing the effect of GSM-102 exports on
farm prices themselves.  The two estimates that USDA originally gave
us did not describe the methodology.  Our records show that we orally
requested information on the methodology but did not obtain it. 
After commenting on a draft of this report, USDA provided us with a
copy of the computer model that it said was used to generate the USDA
estimates discussed in this report. 

4.  It is not obvious that the variables cited by USDA would increase
the relationships between the impact of changes in stocks and
commodity use on farm prices and deficiency payments.  It should be
noted that USDA's model, which we obtained after USDA commented on
our draft report, included only one of the seven specific variables
that USDA criticized us for ignoring (i.e., loan rates). 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV


   GENERAL GOVERNMENT DIVISION,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix IV:1

Philip J.  Thomas, Assistant Director
Wayne H.  Ferris, Project Manager
Gezahegne Bekele, Senior Economist


   EUROPEAN OFFICE
-------------------------------------------------------- Appendix IV:2

Paul M.  Aussendorf, Assignment Manager
James R.  Jones, Sub-Project Manager
David M.  Bruno, Evaluator


*** End of document. ***