CENTRAL INTELLIGENCE AGENCY.
MEMORANDUM FOR: Mr. Stephen H. Goodman
Vice President for Policy Analysis Export-Import Bank Washington, D. C.
Western Credits to the USSR and Eastern
Europe: Policies and Implementation -
Attached is the information you requested early this week concerning Western credit policies and practicesis the USSR-and Eastern Europe. The countries covered are France, Italy, west Germany, the United Kingdom, and Japan. One or two of the most recent credits or credit lines are included for each of Che five countries. on earlier credits can be found jn the attachment to our memorandum forwarded to Mr. John Huber inopy of which is attached.
if we can be of any further assistance, please let us know.
Office oi economic Kcsuciircn
HISTORICAL REVIEW PROGRAM RELEASE AS9
- -n. ill.
at advantageous. Also, thererovision for the consolidation of all. maturities of more than seven years at subsidized rates by BFCE out of
funds either advanced directly by the Treasury or raised
on the financial market under government guarantoe.
The conditions for financing and insuring French credits to the USSR are set down in agreements, renewed every five years, between the USSR state Bank and five French commercial banks, which act as channels for financing Frenchrench exporter must requestupplier credit through one of the five contracting French banks. In practice, however, the credits are divided among the entire French banking community. Buyers credits are also available-to the USSR but are rarely used because they couldull percent in interest.
The4 Franco-Soviet credit agreement8 billion line of credit valid for five years: illion reportedly were allocated for small and medium size5 billion for large projects,6 billion for steel pipe and pipeline construction. The credits arc repayable overyears at interest rates1S&depending on the size of the transactions. These..cites compare favorably with current market rates but are higher than those on previous French credits to thelause in the agreement providesenegotiation of the minimum interest rateapplicable for large value projects
after years,enegotiation of the maximum rateapplicable for smaller value transactionsafter one year. Finance for ship construction, however, complies with the OECD protocol limiting the minimum interest rate to Bt.
Francu routinely makes credits available to East European countries under tho same general conditions as those for the USSR. Inor example, it was reported that France was doubling its credits to Poland for the purchase of French goods to0 million by the end The interest rate was in the range oftaly
Financial support from the Italian government enables Italian banks to offer the USSR and East European countries low-interest fixed rate credits in support of Italian exports. Soviet and East European purchases may be financed eitherupplier or buyer credit basis. In all cases loans are initially made by one of several major medium-term Italian credit institutionsIstituto Mobiliare Italiano (IMD, Mediobanca, Efibanca. An official rediscount agencyHediocrcditoenables these banks to offer low-interest credits. Government funding allows Mcdiocredito to either refinance the export credits provided by the banks or to pay interest rebates directly to the banks.
The loans granted by the medium-torm banks must also carry government insurance guarantees to qualify for the Mcdiocredito support. Such insurance is issuedase
by case basis by the Istituto Nazionale della Assicurazioniovernment-operated agency which is administered under the joint control of the Ministries of Foreign Trade, Foreign Affairs, Treasury, Industry and Commerce, and the National Institution for Foreign Trade. INA reviews each application for the creditworthness of the borrowing country and the credit terms which have been offered by the banks.
The Soviet Union has sought to gain Italian agreement to the establishment of sizeable credit linos to cover Soviet purchaseseriod of several years. Suchagreements would in turn, guide INA (andMediocredito) operations during the period in question. The Italians are not anxious to grant subsidized creditseveloped nation and have been limited by domestic economic difficulties in their ability to grant such subsidies. The Italians recently refused tolanket line of credit to the USSR and told the Soviets that the availability of subsidized credits will be decided by the governmentase by case basis prior to contract signing. ItaliAn government officials have admitted, however, the subsidized credits to the USSR will be made, butore controlled basis than in the past.
In5 the Italian government, agreed to providecredits to support the sale of0 million in signed contracts for chemical plants to be delivered to the Soviet Union. The credit callsownpayment ofnd carries an effective interest rate The credit will run for eight years from the time of delivery. While no recent information on Italian credits to East European countries is available, Italian exports to these nations are presumably financedimilar basis. It is unlikely, however, that Eastern Europe has been able to gain credits on terms as favorable as those granted to the USSR, where particularly large orders hang in the balance. West Germany
Soviet and East European imports of West German capital goods are financed at market ratesupplier credit basis. Although the west German government provides commercial and political risk insurancepecial rediscounting facility for trade credits, it does not directly subsidize interest rates for trade credits or otherwiseajor role in the mobilization of funds in support of capital goods exports to the USSR or Eastern Europe.*
Requests for insurance and financial credits are initiated by therade credits are normally provided by the AlGT" (Ausfuhrkredit onsortium of German commercial
*Swihg credits granted to East Germany are the exception.
banks whichupported in partpecial line of rediscount credit made available by the Bundesbank. The use of Bundesbank facilities can reduce interest rates by someelow market levels, but the rediscounting facility is available only for the first four years following the contract signing ordepending upon lag timefor theears of the credit extended upon delivery.^ esult, for longer term credits, the major portion of export financing is provided by the AKA without any government assistance. The rate of interest varies and is usually% below the long-term market rate. When insurance and other costs are included, the effective interest rate for export credits approach the market rate of interest.
Political and commercial risk insurance is required for AKA funding and is made available by Hermes Kreditversi-cherungs rivate company which has been given the responsibility for providing official export credit insurance for supplier credits. Requests for insurance are reviewed by Hermesase-by-case basis, with particular attention paid to the credit terms to be made available. (In most instances Hermes attempts to keep West German credits within Berne Union guidelines.)
Nominal interest rates on loans advanced to the USSR and Eastern Europe are usually denominated at rates well below market. In these instances the West
German exporter makes arrangements with banks to cover the costs accruing frora this differential. The exporter, in turn, increases his selling price (with full Soviet knowledge) to cover the anticipated cost of this subsidy.
The recent Soviet contract for large diameter pipes exemplifies the type of trade financing available in West Germany. ear loan callsownpayment to be repaidnterest rate. illion DM credit was made availableonsortiumest German banks at market rates (presumably using the AKA facilities). Mahnesmann, the Bupplier of the pipes, and Ruhrgas, the purchaser of the natural gas the USSR will deliver in repayment for the pipes, are to jointly absorb the difference between market rates of interest and tha fixed rate of the loan. This cost is being passed through in the
prices received for the pipe and paid for the gaB.
West German financing of trade with Eastern Europe is financed in the same manner, although no examples of recent credit expansions are currently available. United Kingdom
The UK government does not have any specialized institution providing export credit financing. Under arrangements concluded with the government and operated by the quasi-government insurlffg organization. Export Credits Guarantee Departmentowever, the private UK clearing banks and merchant
banks have provided export credits at subsidized fixed rates of ii.terest.
Credits of two years or longer insured by ECGD are eligible for subsidized rates of interest. All countries, including Cummunist countries, are eligible for ECGD insurance, which covers political and commercial risks. Since UK entry into, however, it appears that other EEC member states are not eligible for subsidized credits.
Under the ECGD guarantee system, the clearing banks provide cash for exports up to the equivalentf current account deposits. For this, they charge the borrower the subsidized, fixed rate of interest and receive from ECGD the difference between the subsidized rate and the commercial rate of interest. For amounts overevel, ECGD refinances the banks.
ECGD-backed loans take the form of both supplier credits and buyer credits. The latter is the type generally employed in financing UK exports to the USSR. Usually, there is an intergovernmental agreement that ECGD willpecified amount of credit, which must be taken uppecified time. ritish bank then makesum to tho USSR to purchase equipment in the United Kingdom from a_ variety of suppliers. inimum contract value is agreed upon for utilization of the credit line and contracts must be placedertain date. This usually applies for
capital goods exportsinimum value of, although it is possibleroup of smaller contracts to qualify for the minimum.
3 billion ECGD facility pledged by Prime Minister
Wilson in5 illustrates the procedure whereby
ECGD coverage is committed for lines of credit which are to be made availableive-year periodubsidized fixed rate of interestt and with repayment over as many asears. The interest rates pledged by Wilson are higher than theredits previously available to the USSR, but still below market rates. The first deal to bo financed under3 billion ECGD facility apparently will7 million order for spark-plug equipment. Lloyds Bank reportedly is nowredit with the Soviet Bank::or Foreign Trade to finance the salo.
The United Kingdom routinely makes credits available to East European countries under the same general conditions as those for the USSR. Inor example, National Westminister Bank granted anillion credit to Bankarszawie for the purchase of UK capital equipment. To qualify under this line ofontract must range from0 thousand to aboutillion and be placed boforcr The termsears
repaymentepending on terms provided by competitor
Soviet and East European capital goods imports from Japan are normally financed by long-term, low-interest supplier's credits. Under the Japanese export financing system the exporter's commercial bank applies to Japan's Export-Import bank (Eximbank) for financial assistance. The final loan consistslend of low-interest Eximbank funds and commercial funds loaned at market rates. Eximbank* usuallyf the contract price.
Japan's Eximbank is supervised by the Ministry of Finance and is supported by government funding and special borrowing privileges. While commercial and political risk insuranceavailable from the Ministry ot International Trade and Industryis not required by law for Eximbank participation, it is usually demanded in practice.
For several years the USSR had unsuccessfully pressured the Japanese government to provide credits directly to the Soviet Bank for Foreign Trade. Finally inhe Japanese government (via Eximbank) agreed to permit buyers credits for the USSR and an agreement was signed between Eximbank and the Soviet Bank for Foreign Trade providing long-term financing% interest forillion in Japano.se exports.
In5 Soviet pressure ledecond buyers credit to cover the sale3 million in ammonia plants. The exact terms are still not available, but Bximbank will reportedly provideear credits% interestf the purchase price.
The Japanese have also provided trade financinguyers credit basis to Eastern Europe. Inor example, Romania received amillion buyers credit to cover purchases associated with the port development at Constanza. ear credits carry an interest rate