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European Banks Grant Soviets $6-Billion Credit

Times Staff Writer

In an effort to speed its industrial modernization and to underpin its overall economic reforms, the Soviet Union has arranged lines of credit with European banks totaling more than $6 billion, European bankers and businessmen said here Tuesday.

An agreement signed here Tuesday with a group of West German banks for $1.67 billion worth of credits will go largely to finance the modernization of 200 Soviet factories producing consumer goods and processing food, a massive overhaul intended to produce fast results in terms of both the quantity and quality of a wide range of products.

For the record:
12:00 AM, Oct. 28, 1988 FOR THE RECORD
Los Angeles Times Friday October 28, 1988 Home Edition Business Part 4 Page 2 Column 2 Financial Desk 1 inches; 27 words Type of Material: Correction
Because of a transmission problem, the name of a bank owned by the Italian government was misspelled in an article in Wednesday’s Business section. The correct name is Mediocredito Centrale.

“The money was virtually spent even before the final agreement was concluded,” said a senior West German bank executive accompanying Chancellor Helmut Kohl on his first visit to the Soviet Union. “By the end of the year, we expect all the orders to be in and that even some of the work to be under way and the equipment to be shipped. . . . The Soviet side is in a great hurry to get on with the work ahead.”

A similar pact was signed earlier this month with Italy for $775 million worth of export credits, organized by the state-owned Mediocrito Centrale. Italian executives said that at least half was committed after a 10-day trade fair here that drew more than 200,000 people, nearly half of them specialists from Soviet industry.

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No Limit on Credit

Negotiations are nearly complete with British banks for credits equal to at least $1.75 billion, and perhaps as much as $2.6 billion, and with French banks for a reported $2 billion, according to bank representatives here.

“We have lent more to the Soviet Union before,” another West German banker said, recalling a larger loan five years ago to finance construction of a gas pipeline, “but these credits will bring an unprecedented degree of economic cooperation, involvement of our industrialists in a crucial part of the Soviet economy at a critical time.”

Vadim Rigo, a senior executive at the Soviet Bank for Foreign Economic Relations, told Reuters Economic Service on Tuesday that the expansion and modernization of light industry are priority tasks that require extensive foreign as well as domestic financing.

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The Soviet leadership, always cautious in the past about borrowing abroad, has not set a limit on the amount of foreign credits that it will seek, other Soviet banking sources said, and will probably look for more loans in Western Europe over the next five to 10 years.

“Credit not only from West Germany but from all of Western Europe will be increasing and expanding in coming years,” Peter Pietsch, a trade and finance specialist with West Germany’s Commerzbank, which participated in the loan consortium led by Deutsche Bank, commented in Frankfurt. “This has to do with the Soviet Union’s goal of opening up politically and economically, and that includes an increase in trade.

“The Soviets can only accomplish more activity in trade if they have enough loans from Western countries. By helping the Soviet Union modernize now, we can create the climate and conditions for an even larger market in the future.”

In his talks Tuesday with Kohl, the visiting West German chancellor, President Mikhail S. Gorbachev called for a major expansion of economic cooperation, including joint ventures as well as trade, between the two countries. West Germany is the Soviet Union’s largest trading partner in the West, with two-way trade totaling $8.5 billion last year and an increase of 25% in the first half of this year.

“We have firmly decided to change our situation in the international division of labor and embark on economic interaction with the outside world,” Gorbachev told Kohl. “We gather that many (businessmen) in West Germany have understood our intention and seem ready to meet it halfway.”

The Kremlin’s new willingness to borrow heavily abroad reflects the urgency that the Soviet leadership sees in keeping the promises of faster economic development and a higher standard of living that Gorbachev made to the country’s population when he launched his sweeping perestroika reform program , a restructuring of the whole Soviet political, economic and social system.

Gorbachev’s economic advisers have urged him for nearly a year to borrow more abroad to modernize light industry and to put more consumer goods in the stores.

‘Must Fill the Gap’

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Although revised plans call for a 6.7% increase in production of consumer goods next year, Soviet economists acknowledge that this is almost insignificant when measured against the demand for more and better goods of all types--clothing, furniture, household appliances and, above all, food.

And some economists have gone as far as to suggest using foreign loans, or even selling a portion of the country’s gold reserves, to import consumer goods from abroad in the effort to convince people that perestroika is bringing real change.

“As the sector producing consumer goods and food in the Soviet Union fails to meet the demands of the general public . . . we must fill the gap by buying and bringing in some of the articles,” Alexander Bogomolov, an economist at the Institute of the World Economy and International Relations, said this week.

While most of the money will be used to buy new manufacturing equipment and other capital goods, some of the agreements permit a portion to be used to buy consumer products.

The loans will also be used to purchase Western technology to modernize key sectors of the economy--including telecommunications, transport, the chemical industry, biotechnology and the manufacture of machine tools--that would improve overall efficiency and help expand exports beyond raw materials and oil and gas.

Rigo told Reuters Economic Service that Soviet purchases would be concentrated on the most advanced technology, and Gorbachev mentioned nuclear power, machine building, electronics, electrical engineering and environmental protection as areas for cooperation.

The credits from groups of British, French, Italian and West German banks reflect the conviction in many West European capitals that Gorbachev’s reforms must be supported if East-West tensions are to be reduced.

Prime Minister Ciriaco de Mita of Italy, after a visit here earlier this month, went as far as to propose a full-scale effort by the European Communities to reconstruct the economies of the Soviet Union and its allies in Eastern Europe just as the United States had helped rebuild Western Europe through the Marshall Plan after World War II.

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But Geoffrey Howe, the British foreign minister, rejected that concept Tuesday. “We are not in the business of giving money away to the Soviet economy, nor, I think, is anybody else, although they have used phrases that might make it look as though they were,” Howe said in a British Broadcasting Corp. interview. “There’s no question of a Marshall plan.

“We are not rushing in, pouring money down their throats, but seeking good business opportunities at the same time as pressing them to change their system, which is intolerable.”

The United States has reacted with concern about the size of the credits.

State Department spokesman Charles Redman said in Washington last week that the United States expects its allies to restrict their trade to non-strategic areas and not to subsidize the credits to the Soviet Union.

Defense Department officials told newsmen, however, that they saw the loans as strengthening the Soviet Union not only economically but militarily by freeing more money for defense.


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