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28 October 2016

Russia is bankrolling a "global revolution"…its citizens will manage somehow

Vladimir Putin has gifted almost 200 billion dollars to other states by waiving outstanding debts and issuing donations 

A witty ditty, popular back in the Soviet days, had it that Fidel Castro should return Russian oil and take back his sugar before proceeding to go forth and multiply. Actually, Soviet policy is one of the reasons why Russia inherited a serious problem which must be handled alongside contemporary quandaries created by the Russian authorities. The Soviet Union conducted an expansionary external policy far afield which encompassed countries such as Afghanistan, Cuba, North Korea, Syria, Ethiopia, Mongolia, Angola, Algeria, Yemen, Iraq, Vietnam and others which “made the socialist choice” as described using the official soviet vernacular of the time. Countries involved in the “Non-Aligned Movement”, like India, were also encouraged. These countries received military aid, loans and favorable bargaining terms involving the offsetting of debts.

The purpose behind all of these moves was to increase the political influence of the communist regime of the USSR and to maintain control over both the occupied territory of the German Democratic Republic and Eastern Europe. The scale of subsidies granted to the latter should not be underestimated. Undoubtedly, from a historical point of view, it would be fair to say that aid granted to these countries was incommensurate to the damage caused by the presence of the absurd Soviet socialist system forcibly imposed upon them. However, the population of the USSR also suffered: according to Soviet rulers, support provided to communist regimes of occupied countries of Eastern Europe was to take priority over the needs of its own population. Those fortunate enough to be given the chance to go on business trips abroad were taken aback by the relatively high standards of living enjoyed by citizens of member states of the Council for Mutual Economic Assistance (Comecon). However, this “affluence” was paid for thanks to Soviet subsidies. Loans granted to Poland in the period of escalation of anti-governmental protests serve as a case in point. Warsaw benefitted from almost 3 billion dollars in loans (about 12 billion dollars at current exchange rates) only in 1980-1981.

Settlements of foreign trade transactions between the USSR and Eastern European countries were carried out with the use of the so-called “transferrable ruble” rather than in a freely convertible currency. The exchange rate of the “transferrable ruble” was inexplicably arrived at by Russian public officials. Eventually, it transpired that Russia was indebted to Eastern European countries as the legal successor of the USSR. In the interests of clarity, it should be pointed out that here we are not referring to the payment of reparations following a recognition by Russia of its responsibility for half a century of occupation (Russia has never acknowledged it past ills), only the results of “management” by Soviet economists are to be addressed here.

There was another problem stemming from the fact that Russia granted loans in rubles to the majority of countries (except for Iraq and Libya). The exchange rate of the ruble skyrocketed given the high inflation of the early 1990s. Hence, it became necessary to conduct negotiations on the settlement of mutual claims. These negotiations took place in the 1990s, although an agreement with Montenegro was reached as late as in 2007. The following countries had the largest debts prior to Russia’s succession of the Soviet Union: Cuba, North Korea, Mongolia, Vietnam, India, Syria, Iraq and Afghanistan. However, several rulers of these countries did not want to pay back their debts in principle and hence payments were made by only India, Mongolia and Vietnam. Let us look into some of these cases.

Writing-off Soviet era debts

The agreement on the settlement of the Cuban debt owed to Russia stipulated that the accumulated debt of 35 billion dollars would be expunged thusly: 90% of it was to be written off while the remaining 10% was to be repaid over a period of 10 years. Although Cuba was devastated by the communist regime, it is worth remembering that it is home to attractive natural resources: nickel, sugar and tobacco. One could be forgiven for imagining that Russian businesses were to become shareholders and yet, Putin would not permit such a move. Moreover, former Finance Minister Aleksey Kudrin publicly declared that Cuba simply had no intention of repaying the debt.

In 2007, Afghanistan’s 11-billion-dollar debt was written off. Apparently, there was no alternative in this case: it was clear that Afghanistan, languishing in its fight against the Taliban, had no means by which to repay the debt. Still, it remains a sad reminder of the Soviet invasion which sparked the war in this country. More or less the same can also be said of Ethiopia whose debt of approximately 4.8 billion dollars was written off at two junctures in 2001 and 2005.

In 2014, 90% of North Korea’s debt of 11 billion dollars was written off and clearly, Russia may as well forget about repayment of the outstanding debt at least as long as the Kim dynasty remains in power. It is noteworthy that Russia has repeatedly ramped up sanctions against North Korea in connection with the latter’s nuclear and missile programs which pose a threat not in terms of abstract “geopolitical” interests, but rather to cities of Russia’s Far East. Why write off the debt given these circumstances? In a bid to annoy the US? It would seem so, in light of the apparent lack of any alternative explanation.

Russia wrote off 9.5 billion dollars of Vietnam’s 11 billion Soviet era debt in 2000. Vietnamese communists would not have won the civil war or the subsequent war with China had it not been for financing from the USSR. Vietnam thanked Russia with a share in the Vietsovpetro joint venture, quite a successful oil-production enterprise which was already doing business prior to the debt remission. JSC Zarubezhneft reported that it had turned over 8.6 billion dollars in the country in 2011 in its 30 years of operation on the Vietnamese market. However, this figure cannot be verified. Oil extraction in Vietnam comprises more than half of Zarubezhneft’s total oil output of (2.5 out of 4.7 million tons). On the other hand, the state’s dividends were not so high – amounting to as little as 4.5 billion rubles (approximately 70 million dollars) in 2015. However, due to the fact that Vietnam is searching for new oil deposits, the deal is not entirely lacking in promise, theoretically at least.

Russia absolved over 90% - i.e. 12 billion dollars - of Iraqi debt in February 2008. In kind (as requested by Putin), Lukoil retained a 75%-stake in a large oil field West Qurna (20 million tons per annum). The Russian company had been the owner of this oil field previously, too, but it had lain dormant due to the sanctions Saddam Hussein’s regime was subjected to. Iraq offers favorable conditions in financial terms as safe oil production is ensured even during times of war. It is difficult to say to what extent Lukoil’s interests resemble those of Russia. It might have been worthwhile seeking to get the money back instead. However, on the face of it, the deal does not seem entirely meaningless.

The situation as regards debt cancellation in the case of Mongolia (11 billion dollars) is seemingly just that. The thing is that Russian companies have long been interested in local coal, copper and uranium deposits. However, Mongolian partners were in no hurry to honor their promises. As a result, the Rostekhnologii corporation had to relinquish a 49% stake in Erdenet and Mongolrostsvetmet.

In contrast, the remission of 4.5 billion dollars of Libyan debt equated to sheer madness. To begin with, Libya’s external assets alone amounted to at least 20 billion under Gaddafi. Simply put, Gaddafi was in a position to repay the debt but he simply did not want to. Libya promised Russia contracts for the construction of railways, oil fields and arms procurement instead. The latter two projects never made it beyond the drawing board due to the overthrow of the dictator and the civil war. Construction of the railroad did commence but has since been abandoned while Russian Railways recorded losses of 500 million dollars. Gazprom was promised a stake in the development of a large Elephant deposit but the promise was not kept.

Russia granted debt remission to the regime of Bashar al-Assad with respect to almost 10 billion of 13 billion dollars of debt in 2005. Russian companies were invited to participate in oil extraction in the east of the country and supply Russian weapons in return. Assad is one of the longest-standing fighters against the “Western nations” and one of the most devoted “friends of the USSR” alongside the likes of Cuba, Vietnam and North Korea. However, ultimately, purse strings remained taught and Russia now supplies everything free of charge whilst incurring huge, direct material losses amidst the war raging in Syria.

The situation with the Algerian debt is slightly better on the face of it. For some reason, remission of the debt in the amount of 4.7 billion dollars was offered to this gas-rich country in 2006. Algeria has promised to buy weapons for a comparable sum in return.

The fate of India’s large debt is relatively rosy. In 1993, India agreed to pay back 7.5 billion dollars over 12 years and another 4.5 billion – over 40 years. The debt is to be discharged not with hard cash but mostly goods and assets it is, however, being repaid.

Thus, in total, Russia has written off more than 130 billion dollars of Soviet era debt. Indeed, some debts were irrecoverable (for example, loans granted to numerous African countries which are not even mentioned here), but many were not.

Putin’s subsidies for other countries

Putin has already written off new loans he himself issued. Thus, in 2013, the Russian president granted the remission of debt in the amount of 500 million dollars to Kyrgyzstan. Uzbekistan’s debt of 875 million dollars was written off amidst the financial crisis in December 2014. Venezuela, run by Soviet-type communists, regularly receives billions of dollars in credit despite overdue past loans. I doubt the government which replaces the communists will repay this money.

Despite its own difficult economic situation, Russia continues to provide massive loans to other countries. For example, oil-and-gas-rich Iran received a loan of 2.5 billion euros from Putin for infrastructure development after sanctions were lifted (which was only detrimental for Russia as an exporter of crude oil). Does this mean that Russia has no problems with infrastructure? Huge loans allocated for the construction of nuclear power plants abroad appear increasingly doubtful. Yes, it is true that nuclear industry organizations from many developed countries provide loans to users of their services. Finland or Hungary are one thing but Egypt is an entirely different story. The latter was issued a loan of 25 billion dollars to be repaid over 22 years. I wouldn’t personally be prepared to wager that the state will continue to exist in its current form and not under the rule of some sort of Islamic state type group in the years to come nor would I be prepared to adopt anything other than a similar stance with respect to the loan of 11 billion dollars granted to Bangladesh.

The budget would have been replenished with 4 trillion rubles in the absence of foreign lending. This sum is almost equivalent to Russia’s total annual social spending, a country inhabited by 140 million people (4.4 trillion rubles in 2016). We will see that ALL social expenditure from the federal budget could double not only in the subsequent year but also for years to come if the abovementioned 4 trillion rubles is accompanied by, for example, a cut in the spending of state-owned companies by 10% (2 trillion rubles a year), a return to 2011 level military spending (1.5 a trillion rubles a year), a payment of 50% of profits as dividends by state-owned companies as per the IFRS (450 billion rubles), a reduction in spending of the state apparatus by 30% (600 billion a year) as well as a cut in media state financing (80 billion rubles a year).

Let us go back to where we started. The overarching aim of all these investments is the expansion of Putin’s political control. One country alone has long been too little for Vladimir Putin who dreams of world recognition (although he is heading in the opposite direction in the eyes of the majority of countries).

As Dmitry Medvedev recently informed a pensioner from Crimea who voiced her grievances concerning her monthly allowance of 8 thousand rubles (a little over 100 euros): “There’s no money”. There was a Soviet joke about who will have money under the communist system. The proper dialectic answer is that some people will have money but others won’t. Well, it turns out that “fraternal peoples” and, most importantly, “fraternal rulers” will have money at Russia’s expense whereas Russia’s citizens won’t.

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