What's Next A Soviet Bake Sale?

It's the $64 billion question. As Moscow runs critically low on hard currency (charts), will the Soviet Union be forced to undergo a humiliating Third World-style foreign debt rescheduling?

While the Soviets aren't demanding debt relief yet, Western bankers say Moscow will have to scramble to repay some $12 billion in foreign loans coming due this year--plus an additional $5 billion in long overdue bills from Western suppliers. Indeed, says Banque Nationale de Paris Senior Vice-President Pierre Tailbot, the Soviets will have to "empty every drawer they can find" to raise cash.

Already, Moscow has clamped down on imports and is selling rubles to Western tourists at the black market rate of 30 to the dollar. That's less than a tenth of the price only last winter. Yet another move: huge sales of platinum and other metals on world markets. Tony Warwick-Ching, a senior consultant at London's Commodities Research Unit Ltd., figures the Soviets may have raised $1 billion so far this year from metals sales. "It certainly has the look of a fund-raising exercise," he says.

QUICK FIXES. These and other maneuvers might stave off a debt shock for the remainder of this year, bankers say. But banks are refusing to lend Moscow any new cash, and Western governments are refusing to advance the Soviets much more than pocket change until radical economic and political reforms are put into place. As a result, Moscow is beginning to suggest that it can't keep its debt payments flowing indefinitely. One senior Bush Administration official says the Soviets secretly broached the subject of debt restructuring to Western governments at the July Group of Seven summit in London, only to be told such a move would be unwise, because it would pulverize Moscow's already dismal credit rating.

Moscow hasn't given up. On Aug. 6, Oleg Mozhaiskov, foreign currency chief at the Soviet central bank, told reporters that "the need to reschedule exists." What the Soviets envision is a set of Western government guarantees that would allow them to continue paying their debts on their present schedule.

That scenario is less worrisome to European markets than the possibility of a request from Moscow for some form of debt forgiveness, like Poland's or Egypt's. That kind of speculation unnerves traders in Europe, where French and German lenders alone account for a third of the $50 billion in bank debt making up the bulk of Moscow's IOUs. In an instant, the value of Soviet loans, now worth 60~ on the dollar on the London money market, could plummet as low as 15~--"around where Bulgaria's is"--estimates Peter Hock, a trader at Lazard Brothers Ltd.

Even worse, warns an official at Germany's Bundesbank, any subsequent debt moratorium could "completely cut off Moscow's access to fresh money" just when it needs it the most. At a minimum, the G-7 probably would put on hold the Soviets' bid to join the International Monetary Fund. "Such moves would make Gorbachev's position very difficult indeed," says a Soviet banker.

Perhaps in recognition of that, bankers believe the Soviets are eyeing a slew of methods to preserve their rapidly falling credit standing. The Soviet foreign trade-finance bank has already retired almost half of Moscow's short-term debt by selling gold, digging deeply into foreign reserves, and taking down some $2 billion in fresh credits. The central bank's Mozhaiskov says the Soviet Union is even considering revealing top-secret data on its gold reserves in hopes of securing Western loans with the precious metal. And Moscow is thought to be discussing the sale--at a discount--of some of its $60 billion portfolio of loans to such countries as India and Algeria. "There's a market for it," says BNP's Tailbot.

ALARMING. Such moves are only short-term fixes for a struggling economy. Amid sagging oil sales, Soviet exports are running 37% below 1990's level, though Gorbachev has offset that decline somewhat by clamping down on imports. The autumn harvest is expected to be 20% below normal, signaling the need for increased grain purchases abroad. And to make matters worse, an alarming $30 billion in Soviet external debt is scheduled to come due between 1992 and 1994.

Whether to stave off default or political chaos on their doorstep, such hardships probably will eventually compel the Soviet Union's European neighbors to continue shoveling money Gorbachev's way. Deutsche Bank, for example, is cooking up a $595 million loan, 98% guaranteed by the European Community, to finance Soviet food imports from Europe. "The Europeans are inclined to prevent the breakdown of the Soviet economy," says Karl Kuhne, executive director of Credit Suisse First Boston Ltd. Even without the economic reforms the G-7 is seeking, the West may have to grit its teeth and keep Moscow afloat a little while longer.

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