As tensions flared on the snowy streets of Latvia and Lithuania, Soviet officials went on a spending rampage in the U. S. They quickly placed one order after another at big Midwestern grain dealers such as Archer Daniels Midland Co. and Continental Grain Co. By Jan. 18, the Soviets had almost exhausted $1 billion in government credits extended by the Commodity Credit Corp. last December. The rush of orders, U. S. traders suspect, was prompted by Soviet fears that the crackdown in the Baltics would spell the end of Western financial support.
They may well be right. Last fall, the rapid deterioration of the Soviet economy prompted international banks to stop making unsecured loans to the Soviets. By courting foreign bankers and politicians, President Mikhail Gorbachev quickly managed to line up some $10 billion in new government loans and cheap credits. But now, outraged by the brutal crackdown, Western governments are also threatening a cutback on lending, which would sever the Soviets' last financial lifeline to the West. That would further crimp Gorbachev's ability to import sorely needed consumer goods and modernize industry, causing more upheaval in his crumbling empire.
Already some countries are stepping up the pressure. A new bill backed by 18 members of Congress would make granting most-favored-nation trade status to the Soviet Union contingent upon Baltic independence. The European Community postponed a plan to give the Soviets $680 million in food-loan guarantees and $544 million in technical aid. Tokyo is also having second thoughts. "If we determine that oppression has occurred, we will keep our traditional position, which is to be very reluctant to grant aid," says Noboru Hatakeyama, a director general at Japan's Ministry of International Trade & Industry.
DEFAULT LOOMING? With financial spigots being turned off, the previously unthinkable prospect of a default on Soviet loans is now rippling through banking corridors. "The Soviets may do what Argentina has done and stop paying interest on their debt," says Keith Crane, senior economist at PlanEcon Inc., a research-and-consulting group. German, Austrian, and French banks are setting up loss provisions against their Soviet loans. Traders now value loans to Vneshekonombank, the principal Soviet borrower, at as low as 75~ cents on the dollar. Since Gorbachev came to power six years ago, Soviet debt has nearly doubled, to $ 64.6 billion (chart). The country has racked up $5 billion in delinquent payments to Western banks. The Soviets used the $3.3 billion in recent loans from Deutsche Bank and other German banks to pay off their debt to German exporters. Japanese banks lent some $500 million in November to help the Soviets repay overdue bills to Japanese trading houses. Even so, the Soviets are almost a year behind in some payments. This year, the International Monetary Fund reckons, the Soviet Union could face a payments shortfall of up to $10 billion.
The wild card, of course, is oil, the Soviets' main export. If prices and production stay low, that will wipe out any gains from new hard-currency sales to the former East bloc. "There will be a total dislocation if you get a dramatic reduction in oil production," says a Moscow Narodny Bank Ltd. executive in London.
The potential opportunities in the Soviet market haven't been entirely lost on bankers. Kuwait recently granted the Soviets a $1 billion credit line, and South Korea plans to lend $3 billion over the next three years. But many Western countries have lost faith in the Soviets. "We can't trust the borrower once the money gets there," complains Peter Praet, chief economist of Brussels' Generale Bank, which now approves only 1 in 10 of Soviet loan requests.
TOTAL CHAOS. The Soviets desperately need to improve their hard-currency earnings, which dropped 20% in 1990 alone. The Belgian government has alerted its banks to an unconfirmed report that Vneshekonombank has used $2.5 billion in hard-currency deposits to pay off Soviet foreign debt, leaving many Soviet depositors with no funds for now. The Soviet bank failed to return calls for confirmation. The trade deficit is expected to hit $5.4 billion this year (chart). "The chaos is so total that no one is managing the balance of payments," insists Ed A. Hewett of the Brookings Institution.
These days, Gorbachev's promise of radical economic reforms looks more remote than ever. Western governments can only hope that by wielding their economic stick in an effort to stop the bloodshed, they don't help push the Soviet economy over the brink.