Soviet Union Granted Billions in Debt Relief

In an effort to rescue the Soviet Union from an immediate financial collapse, the world’s leading industrial nations agreed Thursday to lend the Soviets $1 billion immediately and to defer the repayment of more than $3.6 billion in debts.

But the deputy finance ministers of the Group of Seven nations made further foreign assistance conditional on Soviet implementation of radical economic reforms under the supervision of the International Monetary Fund.

Setting tough terms for Moscow, the ministers said their governments would require more than 100 tons of Soviet gold, nearly half of its remaining gold reserves, as security for the $1-billion emergency loan, but would also continue the short-term credits needed to finance its foreign trade.

If other government and commercial creditors follow the G-7 lead, as expected, the Soviets are likely to get a respite of a year or more from debt repayments, totaling at least $6 billion and perhaps as much as $10 billion in principal. Under the accord, interest must still be paid.

And that, said David C. Mulford, the U.S. Treasury’s undersecretary for international affairs, should give Moscow the breathing space it needs to undertake fundamental economic reforms and to marshal its export earnings to repay its foreign debt, estimated to total between $65 billion and $100 billion.

The Soviet Union and the eight republics that signed the agreement, in return, committed themselves to begin within the next four months a “comprehensive and ambitious” program of fundamental economic reforms to be worked out with the International Monetary Fund and monitored by it.

This program, according to the communique, must include sharp reductions in the government’s huge budget deficit, a curb on the inflationary growth of the money supply, an end to state control of prices and further devaluation of the Soviet ruble so that it will become convertible into other currencies.

Further assistance from the G-7, whose members are Britain, Canada, France, Germany, Italy, Japan and the United States, will depend on “satisfactory progress” in implementing this program in cooperation with the International Monetary Fund.

If honored, the agreement will effectively put some of the world’s most exacting economists at the center of the Soviet Union’s long-stalled reforms and make measurable progress toward a free-market economy the condition of the international assistance Moscow desperately needs.

“The stand of the Group of Seven was extremely tough,” Yegor T. Gaidar, deputy Russian Federation premier for economic policy, said after the agreement was reached. “ ‘Either you accept our conditions without any reservations,’ they said, ‘or we stop the negotiations and thus stop all credits, including food credits.’ ”

The alternative that the Soviets faced, Mulford told a news conference, was “simply catastrophic”--default on repayment of its debts, an immediate and almost total halt to its foreign trade and the subsequent collapse of its financial system.

With the Soviet Union’s economic disintegration already accelerating day to day, the crisis would have been a virtual deathblow to prospects for the creation, now envisioned here, of a free-market economy based on private entrepreneurship rather than state ownership and central planning.

“Everything was at stake,” said a European economist advising the G-7 deputy ministers. “A default would probably end the economic reforms and with it democratization.”

The agreement, reached in four days of hard bargaining here, came with little more than a week remaining before the Soviet Union would have had to tell its foreign creditors that it could not pay more than $1.7 billion due in principal and interest at the month’s end. The projected shortfall for December was even greater, according to Soviet bankers, with about $5 billion in loans due.

Failure to meet these obligations would have brought the immediate suspension of virtually all foreign credits, including those granted by President Bush this week for $1.25 billion in agricultural purchases from the United States.

The package of measures agreed on Thursday begins with a deferral of $3.6 billion in payments due in the next year on medium- and long-term Soviet debts to the G-7 governments, which will encourage banks and other creditors in their countries to defer payments due them. At least $6 billion would be involved and perhaps $10 billion.

Under the agreement, the Soviet Union would continue to pay some interest on all the loans, and payments on the principal amounts would have to be made within the original time frame. The debts, in technical terms, are not being rescheduled, with a longer time for repayment.

Most of this money is owed to Germany, France and Japan, according to American sources, with the United States owed about $2 billion.

“This has not been done before--it is absolutely unique,” Mulford said of the agreement, arguing that the Soviet Union had gained the time it needed to launch its economic reforms without the danger of a financial collapse. “Their repayments will begin to decline in 1992, and the amount of their indebtedness is not large in comparison to the size of their economy. The problem they face is liquidity, not solvency.”

New efforts will be made under the agreement to increase Soviet earnings of foreign exchange through new investment and other financing secured by natural resources and the anticipated export of raw materials, including oil, natural gas and petroleum products.

The G-7 also pledged to continue providing short-term credits, which generally total about $15 billion, through their export credit agencies and to guarantee the credits provided by banks and suppliers.

The third element, an optional $1-billion “gold swap,” is the most complex--and controversial. The G-7 promised an emergency loan to help the Soviet Union meet immediate cash needs, but only if Moscow deposits sufficient amounts of gold bullion as security. Moscow would be able to redeem the gold later, at a price that must still be negotiated. But the deal would have the advantage of not depressing world gold prices by dumping so much on the open market.

“We badly need another $1 billion to enable the economy to function normally,” Ivan S. Silayev, who heads the committee managing the Soviet economy, told journalists, “but we couldn’t agree to a gold swap now for physical and political reasons. It is a very painful question for our society.”

The Soviet Union’s gold reserves have fallen sharply as a result of heavy sales in recent years and now total about 240 tons worth perhaps $2.7 billion--dramatic evidence of the country’s decline as a superpower as well as an industrial giant whose economy two years ago was the world’s second-largest.

Only eight of the Soviet Union’s remaining 12 republics signed the agreement, which also requires them to assume clear responsibility for the repayment of the Soviet Union’s foreign debt. Led by Russia, these included Armenia, Belarus (formerly Byelorussia), Kazakhstan, Kyrgyzstan (formerly Kirghizia), Moldova, Tadzhikistan and Turkmenistan.

The others, including the Ukraine, the second-richest and most populous republic after the Russian Federation, declined to sign, objecting to the principle of joint responsibility or arguing that they would have to pay more than their fair share. Azerbaijan, Georgia and Uzbekistan also did not sign.

The four were bluntly warned by G-7 officials that, if they refuse to pay their share, they would probably get no credits in the future on the international market.

Gaidar, interviewed on Russian television, said that the negotiations were, in fact, “on the brink of failure” as a result of the refusal by these republics and others to accept responsibility for the Soviet debt, and that Russia, together with Belarus and Kazakhstan, broke the stalemate by declaring their readiness to repay the whole debt themselves.

Times staff writer Karen Tumulty in Washington contributed to this report.

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