Aid To The Soviets Should Have Plenty Of Strings Attached

After months that took the Soviet Union back to darker times, Mikhail Gorbachev is again warming to the West. This time, his hand is out for really big money: $100 billion to $250 billion in credits and loans as a swap for continued political and economic reforms.

So far, the steps toward reform seem promising. Gorbachev has agreed with the leaders of nine of the Soviet republics to form a new national union with a new constitution by yearend. The next step would likely be direct national elections. Gorbachev's government has even leaked vague plans for yet another radical economic-reform package to warm the hearts of capitalists. Unregulated prices, the sale of state assets, and a fully convertible ruble--all components of previous reform proposals--are on the table again.

Despite these moves, Western leaders would do well to hang onto their wallets for awhile. For one thing, it's crucial that potential lenders learn just what any reform plan is and what the chances are that it will actually be implemented. In the past two years alone, Gorbachev's aides have worked out at least seven macroeconomic programs, including the most detailed one of all--the so-called 500-day plan announced last fall. Not one has been put into practice.

The West might also ponder what Gorbachev means when he talks about radical reform. The sine qua non for any move to a market economy is permitting private ownership. But for Gorbachev, who grew up as a Communist apparatchik, private land ownership in particular is still ideological anathema. Until he jettisons this dinosaur of Marxist thinking, Soviet reform efforts won't get very far because property will remain largely in the hands of government monopolies.

CLOSED DOORS. Western investors should hear alarm bells whenever Gorbachev uses one of his newest slogans, the "mixed economy." It apparently means that he favors letting state ministries and employees own a sizable share of the newly privatized economy. While letting workers gain ownership would be a step toward creating a market economy, private investors would likely be frozen out. And they would be the most inclined to force tough decisions, such as cutting labor forces to improve efficiency, that employees and bureaucrats would shun.

Also beware of what Gorbachev calls the "socialist choice" in economic reform. He insists on a strong safety net, including wage indexation, to cushion the blows of privatization and inflation. While it is wise to be cautious with privatization, Gorbachev isn't yet comfortable with the notion that moving to a market economy requires a wholesale abandonment of communism.

Potential Western investors are already falling victim to this Soviet ambivalence. For example, after three years of tough negotiations, Chevron Corp., one of the Soviets' most serious potential foreign investors, was ready to begin developing a massive Kazakh oil field. But a blue-ribbon Soviet commission panned the deal, saying it grossly favored Chevron. The panel called for new bidding for development rights. That could delay or kill the Chevron project, sending a profoundly negative signal to other would-be Western investors. Chevron says the project is still on track.

A question worth pondering: Why is Gorbachev making his pitch now? His new overtures to the West are coming just before his archrival, Boris N. Yeltsin, is expected to win election handily as president of the Russian Republic in the first-ever direct elections on June 12. That will give Yeltsin a popular mandate--which Gorbachev has never received. Gorbachev badly needs a warm reception at July's Group of Seven summit in London to boost his standing in the West and at home.

Foreign aid could also shore up Gorbachev's badly sagging central government. It is being forced to hand more power to the republics, but dispensing aid would give it a new role. "Gorbachev wants to distribute the money. He wants to say: `I will feed you. I will give to you,' " says Sergei N. Krasavchenko, a radical economist and Russian Republic parliamentarian.

BLOODY HANDS. Even more vexing than the Soviet leadership's contradictory signals on economic freedom is its start-stop approach to political freedom. Just after Gorbachev's envoys begged for U. S. help, the Kremlin's chief law-enforcement officer exonerated Soviet security forces for killing 14 Lithuanians last Jan. 13. Those slayings by army troops were witnessed by the Western media, including BUSINESS WEEK.

Given all of these problems, the West should grant substantial new credits only under strict terms and supervision. The credits, which realistically will amount to perhaps one-tenth of the high-end request of $250 billion, must be tied to specific projects, perhaps through the new European Bank for Reconstruction & Development. They should be channeled to specific republics, not handed exclusively to the central government for distribution. And disbursement of the credits must be tied to programs to privatize state assets or encourage entrepreneurship. Also, loans should be used to backstop speedy efforts to make the ruble convertible and end state subsidies.

After all, it is the West's money, and the West is not responsible for the quagmire that is today's Soviet economy. If Gorbachev and other Soviet leaders can't put their pride on a shelf for aid, the West's billions could simply vanish into a black hole.