Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Loan Craze of '80s Leaves Mark

The order seemed simple enough in the late 1980s: 79 brand-new fishing trawlers for the Soviet Union to upgrade its fleet.

Work began at European shipyards, financed by bank loans backed by millions of dollars in guarantees from the Soviet government.

But when the Soviet Union collapsed in 1991, the trawlers and the bills for them went separate ways. The boats slipped into private hands; the new owners promptly disappeared into a web of offshore companies and the Russian government was left owing $1.5 billion. The debts were later rolled into the $42 billion Russia owes to a group of Western governments known as the Paris Club.

After 10 years of stalling and haggling with its creditors and two defaults, Russia is now paying up. Ample oil revenue and a booming economy have made Russia's 2001 and 2002 interest and principal payments manageable.

After that, though, it may not be so easy: Nearly $19 billion will come due in 2003, and the government is trying to negotiate relief of some of the burden. Last week in St. Petersburg, German chancellor Gerhard Schr?der discussed Russia's debts with President Vladimir Putin, though little progress was made. Germany is the biggest single creditor in the Paris Club, holding about half the total owed.

Even if it does win some relief, Russia is feeling the cost of servicing all this debt, prompting it to take a closer look at just how it was run up.

Much of it was borrowed hastily in the chaos of the Soviet Union's dying days and is now the legacy of a bankrupt state that lost control of its finances and, ultimately, its very property.

Often missing from the back-and-forth between Russia and creditors like Germany and the United States, who have taken a tough line in negotiations, is the identity of some big beneficiaries of the borrowing: Western companies like the shipyards. Many credits granted to Soviet President Mikhail Gorbachev and his failing state were tied specifically to Soviet purchases of western goods, from German industrial equipment to American grain. For this reason, politicians and taxpayers alike are questioning whether it is fair to expect Russia to pay in full.

The Soviet Union had been borrowing modestly since the 1960s, and made a deal in 1970 with Fiat SpA to build what is now Russia's biggest car manufacturer. In the late 1980s, the onset of Gorbachev's glasnost policies brought both an opening to the West and a relaxation of state controls over company managers. Many of those managers seized their new chance, borrowing recklessly and then privatizing the companies they ran, leaving the government to pay their debts.

"It was like someone died and left a will, a car, an apartment … and all the heirs came and took the goods, but skipped out on all the payments," said Valentin Pavlov, the prime minister under Gorbachev who also served as Soviet finance minister.

In one case, the renowned eye surgeon Svyatoslav Fyodorov bought the surgical center he directed, which was built largely on Soviet-era loans, and then persuaded the Russian government to assume responsibility for the debts, according to Anatoly Chubais, the architect of Russia's state-asset sales program.

"That was the worst Wild West period," said one Western adviser to the Russian government, who spoke on the condition of anonymity. "There was a lot of what you'd call self-privatization. … Red managers grabbing things.

"Gosplan had lost control," he continued, referring to the state planning agency, "and Gorbachev wasn't asserting his authority. A lot of joint ventures spinning off from state enterprises gave rise to theft."

The fishing trawlers exemplify the problem. About half the boats never even reached Russia, instead disappearing abroad along with the bureaucrats who were supposed to oversee the purchase, according to the State Fisheries Committee chairman, who investigated the case last year. The trawlers that did reach Russia were transferred to private owners, but the lease payments on them were made sporadically or not at all.

Foreign debt tripled over the six years that Gorbachev led the Soviet Union, from 1985 to 1991. A combination of low world prices for oil, the Soviet Union's biggest export, and an ill-fated anti-alcohol campaign had left the treasury depleted. Gorbachev began asking for loans to prop up his crumbling state.

"Our officials were running all over the world taking loans … Gorbachev in Paris, billions coming, Gorbachev in London, billions coming," said Boris Fyodorov, a former finance minister who at the time was an adviser to the Soviet government. "It was clear that the amount of loans was quickly exceeding Russia's capacity to repay them. In May 1990, we warned Gorbachev of an impending debt crisis."

At a time when the Soviet state was at its least cost-conscious, it had vast new access to funds, and it was borrowing uncontrollably, in many cases simply to cover current costs like subsidizing imported food and clothing to cover gaps in the rapidly disintegrating Soviet supply system.

Russia was running out of everything. Even city governments were borrowing overseas. Chubais tells of how a 1990 cigarette shortage in St. Petersburg led to a crowd of desperate smokers blocking the city's main road demanding deliveries. As deputy mayor, he approved a loan to replenish the city's supply.

"The whole ship was sinking, and loans were taken to plug the holes," Chubais said.

In the West, export credits were seen as good business. Companies were eager to get access to a vast and underserved market ahead of competitors or to unload excess supplies where they would not depress prices at home.

At one point in the early 1990s, there was so much American chicken for sale in Russian markets that people began jokingly calling drumsticks "Bush legs."

In hindsight, some experts say, it was hardly wise to lend so lavishly to a very weak Soviet state deep in financial crisis. Credits were poured into industries that had never before been obliged to stick to a budget or repay a loan.

"The West was closing its eyes," said Fyodorov. "We never needed so much grain."