G-7 Leaders Bring Discord to Summit : Economics: Facing domestic political woes, many delegates are limiting expectations. And they are making points of policy conflict unusually clear.

The leaders of the world’s seven biggest economic powers gathered on Sunday in search of leadership for the post-Cold War world, but what they found instead was mostly discord and discontent.

From President Bush to Japanese Prime Minister Kiichi Miyazawa and German Chancellor Helmut Kohl, the old Cold War allies arrived for their annual meeting in varying shades of the same bad mood: politically besieged, economically struggling and disinclined to make any risky deals.

Even before the formal opening of the three-day summit today, all sides were downplaying their expectations for results and making their points of conflict unusually clear.

* In trade negotiations, where Bush and Kohl had pressed for a deal in time for the summit, U.S. and European negotiators failed to reach agreement despite a last-minute flurry of talks; German and French officials blamed the United States for the logjam.

* An unusually assertive Japan announced its opposition to Russian President Boris N. Yeltsin’s plea for debt relief and to a European plan for cleaning up Eastern Europe’s nuclear power plants.

* Several governments poured cold water on Bush’s suggestion that Russia be made a member of the economic powers’ club, the Group of Seven.

There was some good news amid the grumbling. The International Monetary Fund announced that it is ready to move ahead with a proposal for $1 billion in early loans for Russia to help Yeltsin’s economic reforms, a promise that should make the Western leaders’ lunch with Yeltsin on Wednesday much more pleasant.

And Bush invited French President Francois Mitterrand to dinner to patch up the increasingly acerbic U.S.-French relationship--and apparently succeeded, at least for now. The two presidents had “a good, strong, deep conversation” and agreed that their disagreements were not “insoluble,” a French spokesman said.

But it may have been a good measure of the allies’ troubled relationships that their best achievements so far were not bold new initiatives, but merely efforts to prevent things from getting any worse.

Part of the problem, officials from several countries noted, is that most of the leaders at the summit face elections soon, and none of them are riding high in the polls, Bush included.

That makes them preoccupied with what their domestic constituents want and reluctant to sign up for joint efforts that may require sacrifice.

“Almost every leader in difficulty at the polls is going to be making sure that whatever happens in Munich can be explained back home as resulting in an economic benefit,” noted Robert D. Hormats, vice chairman of Goldman Sachs International Corp., an investment bank. “The danger of this intensified homing instinct . . . is that they don’t look at the broader picture.”

During the Cold War, the United States often made joint action possible by acting as the Western alliance’s leader, applying pressure on others to get in line or making concessions or both.

But at this summit, Bush has less pressure available to apply, and less freedom to make concessions, than most of his predecessors in the White House.

“The West doesn’t have a leader anymore,” said Michael Mandelbaum of the Council on Foreign Relations. “The United States is still the country best placed to lead . . . but at this point we are not well enough placed and not clearly enough disposed to do the job.”

The trade issue was a case in point. For more than two years, Bush has been pressing for an agreement in global trade talks known as the Uruguay Round, warning that the consequences of failure would be a world divided into protectionist, and less prosperous, trading zones. Last spring, Bush and Kohl publicly declared that one of their main goals for the year was to get a trade agreement before the summit. Treasury Secretary Nicholas F. Brady said as recently as last week that a trade pact was still his fondest wish.

But Europe’s farmers mounted massive campaigns to protect the agricultural subsidies that a trade agreement would cut, and both Kohl and Mitterrand bent before their pressure, not Bush’s.

Bush had counted on Kohl as a key ally in forging a compromise. But the German leader said in a television interview Sunday that Europe has moved as far as it can on the issue. “Our American friends also have to make a move,” he said.

Another senior European official suggested that France and Germany were hanging tough, in part because they believe Bush badly wants a trade agreement before Election Day in November--”as a success he can point to,” the official said.

U.S. officials deny any such desire, but it was noteworthy that the Europeans were seeking so openly to play on what they considered Bush’s political vulnerability.

The seven summit countries--the United States, Japan, Germany, France, Britain, Italy and Canada--will issue joint declarations on the world economy and the world political situation. A German spokesman said officials were working on a separate joint declaration on the situation in the former republics of Yugoslavia.

The leaders’ meeting with Yeltsin on Wednesday is formally not part of the summit, but it may well overshadow the rest of the meeting, at least in terms of drama.

Yeltsin announced Saturday that he plans to ask the other leaders to defer payments on the former Soviet Union’s $68-billion foreign debt for at least two years and warned that forcing Russia to keep making payments would destroy his economic reforms.

Russia owes about $43 billion of the total, most of it to Germany and France.

German officials said they are willing to discuss debt relief for Russia, but they didn’t want a confrontation over the issue to dominate their summit. “No one should impose conditions for others,” Kohl, the summit host, said glumly.

Indeed, Yeltsin’s challenge provoked a response from Japan, whose spokesman here, Masamichi Hanabusa, said: “I don’t know exactly what President Yeltsin is up to. . . . I don’t think a summit is an occasion where heads of state discuss technical issues.”

In unusually blunt terms, Hanabusa also restated Tokyo’s opposition to any major increase in aid to Russia unless Yeltsin returns four islands that the Soviet Union seized from Japan at the end of World War II.

“Substantial financial assistance would not be supported by the Japanese people unless the islands are returned,” he said.

Still, Yeltsin’s demand for debt relief put pressure on the summit leaders to deliver more than the measure that they had planned to spotlight--the IMF agreement to provide $1 billion in loans.

Bush and other Western leaders announced a $24-billion aid package for Russia last April, but little of the money has moved. The $1-billion loan would be the first substantial piece to actually arrive in Moscow.

Much of the aid depended on IMF approval for Yeltsin’s economic reform effort, and the fund and the Russian government have been negotiating the precise terms.

In Sunday’s announcement, IMF Managing Director Michel Camdessus said the reforms put into effect so far were sufficient to allow the $1-billion loan, at least, to go ahead. The IMF board must still approve the loan, but U.S. officials said that will be no problem.

The agreement was made after Yeltsin warned Camdessus that further delays in international credits could cripple the recovery of Russia’s economy.

Times staff writer Elizabeth Shogren, in Moscow, contributed to this report.

The Key Topics in Munich

When leaders of the world’s top economies meet, beginning today in Munich, a range of issues will occupy them. Here’s a glance at some of the key topics that the G-7 nations of the United States, Britain, Canada, France, Germany, Italy and Japan--and later Russia--will discuss:

INTEREST RATES

Interest-rate policy is a subject as vitally important to the prosperity of a nation as it is deadly boring to most of its citizens. Low rates make it cheaper to borrow, tend to spur economic growth and help bring the prosperity that goes with it; high rates help cut inflation by putting the brakes on an overheated economy, and they protect economic stability.

The Germans are expected to be pressured by several countries, especially Britain and the United States, to reduce their unusually high interest rates to help stimulate global economic growth. But Germany, where there are vivid memories of the 1920s hyperinflation and financial chaos of the Weimar Era, says it won’t budge. Because the deutschemark is Europe’s bellwether currency, German policy is critical.

Inflation Prime rate Canada 1.7% 7.25% France 3.1% 9.85% Germany 4.6% 11% Italy 5.7% 13.5% Japan 2.4% 5.25% Britain 4.3% 11% U.S. 3% 6%

AID FOR RUSSIA

As the G-7 nation that is most exposed to a collapse of economic and social order in the Soviet successor states, Germany has provided three times more assistance to these countries than all other summit nations combined. While Chancellor Helmut Kohl is unlikely to press for large, new commitments from fellow leaders at Munich, he will ask them to ante up $700 million to $800 million for an emergency program to make Soviet-built nuclear power plants safer from the risk of a Chernobyl-style disaster. Among those who will find such a contribution hardest will be the Japanese, who continue to link any major economic help to Russia with the return of the Kuril Islands, occupied by Soviet forces in the waning days of World War II.

Aid to U.S.S.R., GNP (‘89) ex-Soviets since Sept. ’90 Canada $500 billion $2.58 billion Italy $865 billion $6.3 billion France $1,000 billion $2.3 billion Britain $843 billion $0.15 billion Japan $1,800 billion $2.65 billion Germany $1,200 billion $48.45 billion U.S. $5,000 billion $4.83 billion

AID TO DEVELOPING COUNTRIES

In the aftermath of the recent Earth Summit in Rio de Janeiro, Kohl is expected to work a two-pronged strategy at Munich to try to accelerate cooperation between industrialized and developing countries. First he is expected to underscore his belief that global problems such as the environment and immigration can only be solved through global cooperation. But he is also expected to look for soft enough wording in the final declaration to allow President Bush to sign on and ease the uncomfortable isolation experienced by the American positions in Rio.

Sources: Bank of International Settlement, European Commission, The Economist