Businessweek Archives

The West Is Asking: Who's In Charge Here?


Cover Story

THE WEST IS ASKING: WHO'S IN CHARGE HERE?

It may be the understatement of the decade. Soviet economist Grigory Yavlinsky, who just weeks ago was shopping a "grand bargain" swap of Western aid for Soviet economic reforms, has turned low-key in the aftermath of the abortive coup. "The West should not rush," Yavlinsky warned on Aug. 26. "Nothing has happened yet."

Oh, yeah? The unraveling of the Soviet empire that followed the botched coup has sent shock waves through the West. From bank boardrooms in Frankfurt to NATO strategy meetings to finance ministries throughout the industrialized world, policymakers are grappling with the prospect of 15 countries where one superpower once stood.

CANNY CAUTION. In the long term, the West remains convinced that the end of the Communist empire will give a big push to free-market economics, democracy, and a general easing of military tension. But for now, Western leaders don't know who they'll be dealing with on issues from trade relations to nuclear-arms control. "We can no longer assume that there will be a central government or central authority or a central institution that we can talk to about reform, stability, or anything else," says a senior Bush Administration official.

President Bush's caution, derided as timidity in the early days of the Soviet upheaval, suddenly looks very appealing to his peers. There is accord in allied capitals that the immediate focus must be not on writing checks but on building a safety net in case the Soviet economy crashes this winter. When finance ministry officials from the Group of Seven industrial countries meet in Paris on Aug. 30, they'll agree to provide whatever humanitarian aid will be needed to get the Soviets through the winter. Already, the International Monetary Fund on Aug. 27 voted to establish a $30 million trust fund to finance technical aid for the Soviets or their republics.

The longer-term task is tougher. The IMF and World Bank may face their hardest work since their inception. Western officials, who once balked at giving the Soviet Union even special associate status in the institutions, now must contemplate multiple applications for full membership from many or even every spun-off Soviet republic.

The money, whether from those institutions or from Western governments, will be hard to come by. Germany is begging off doing more, citing the $33 billion already earmarked for Moscow, largely as the price for reunification. France, recession-plagued Britain, and the deficit-strapped U. S. are unlikely to take up the slack. "Finding the money will be a lot harder than deciding to spend it," says a senior U. S. diplomat.

The European Community also will face a flood of membership applications and a sharper debate with the U. S. over the EC's reluctance to open its market to imports from the East. If the three Baltic republics can wangle special status in the EC, community experts estimate that they'll get $2 billion to $3 billion a year in aid for the next five to eight years. But, says Paul Zieber, director of the Institute for East European Market Research in Hamburg, that will fall far short of the massive subsidies Moscow granted the Baltics. "The Baltics will stand with outstretched hands for the next 10 years," says Zieber.

'TOO RISKY.' Japan is better able to help but is deterred by its own special problems. Tokyo will balk at any direct financial assistance unless it wins back four islands seized by the Soviets in the final days of World War II. And Japanese companies, like their Western counterparts, are increasingly reluctant to undertake investment projects in the Soviet Union without government guarantees. "If not, it's too risky," says Shinichi Ishikawa, general manager of the Soviet Dept. for Sumitomo Trading Corp.

The creditworthiness of any new Soviet confederation hinges on choices the republics make. This year alone, the Soviets will require about $21 billion in hard currency to service debt owed to Western banks, estimates Susanne Gahler, an economist at Morgan Guaranty Trust Co. in London. But it remains to be seen whether the republics will repay debts incurred by the Kremlin. On Aug. 28, Boris Yeltsin claimed for Russia a veto over all foreign exchange deals for all of the Soviet Union. A few hours later he backed down, but his flip-flop gave financial markets a sobering reminder of the uncertainty ahead.

Troubling as the financial consequences of the Soviet upheaval are, the threat to global security may be more frightening. For now, the republics are making the right noises about their desire to be responsible nuclear players. But the world could live on edge for years as control of short-range, tactical nuclear weapons becomes a bargaining chip between republics in dispute. "We share the justifiable worry that various nuclear weapons states could result from a collapse of the Soviet Union," says German Foreign Minister Hans-Dietrich Genscher.

STILL UNEASY. That uncertainty, and the sudden freeze in arms control as Soviet politics get sorted out, should give NATO new life. The inability of new institutions, such as the Conference on Security & Cooperation in Europe, to quell even the civil war in Yugoslavia underlines the need for NATO. The French are wrangling to speed up a new, all-European security agency to replace NATO. But, says Helene Carrere d'Encausse, a French Sovietologist: "Europeans are comfortable with NATO even if the French aren't. NATO is necessary again."

As it grapples with this, the West must pick its way through a political mine field. French Prime Minister Edith Cresson is proposing an EC summit meeting with both Yeltsin and Soviet President Mikhail Gorbachev. German Chancellor Helmut Kohl rushed to invite Yeltsin to Bonn. But Washington remains uneasy about Yeltsin. Bush's initial reluctance to recognize Baltic independence was an effort to shore up Gorbachev. And the White House worries about the depth of Yeltsin's commitment to democracy and his willingness to work with other republican leaders.

Fact is, the West has little influence over internal Soviet politics. For the past six years, reformers such as Yeltsin have had the luxury of never having to deliver on promises. Now, absent effective central authority, they have assumed the burden of ensuring stability and maintaining the well-being of 290 million people. If they fail, Yeltsin, too, could be swept away by a whole new wave of reactionaries and nationalists.

COLLAPSE IN THE EAST, DIVISION IN THE WEST

The demise of the Soviet system lays bare a number of conflicts among the industrialized Western powers. Among them:

ECONOMIC AID

The allies are split over cash aid and how to disburse it. France, pushing for up-front funds, will find itself at odds with Japan and Washington

EUROPE

The EC will debate the touchy political question of accepting low-cost farm products from its new associate members in the East. And Eastern Europe has good reason to worry that most Western investment will flow to the resource-rich Soviet republics

ALLEGIANCES

The Administration is split on Yeltsin, because he appears ready to abandon the union and go it alone. Cheney sees him as an efficient tool for dismantling the Soviet Union, but Bush and National Security Adviser Scowcroft worry about raising the risk of chaos

SECURITY

As France revives plans for a more European solution to Continental security, the U.S. and Britain will argue that nationalist tensions give NATO a whole new raison d'etre

DATA: BWAmy Borrus and Bill Javetski in Washington, with Mark Maremont in London, Stewart Toy in Paris, John Templeman in Bonn, and Karen Lowry Miller in Tokyo


We Almost Lost the Nasdaq
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus