Issue #21/102, Oct 26 - Nov 9, 2000   

Corporate Safety Net

By Jake Rudnitsky

Ever since the good old days of the Cold War, the United States always aspired to an ideology with which to preach to the masses in underdeveloped nations. It was never enough to become just a colonial overlord; the United States wanted to offer a glimpse of the promised land.

But despite numerous attempts to prove otherwise, the United States hasn’t been able turn capitalism (or globalism, or free marketism) into a morally saleable missionary creed. Trying to do so has been like trying to make Darwinism out to be a hippie philosophy where animals help each other to keep from going extinct. Still, a series of bullshit attempts in this direction continue to be financed by U.S. taxpayers.

The repeated failures of traditional foreign assistance programs in Russia and the world, such as the United States Agency for International Development (USAID) and government-to-government cash transfers, are relatively well documented. Much has been written about how USAID is an impotent organization that does nothing but provide work for Americans with useless masters degrees. Even The New York Times admits that IMF cash transfers in 1998 were simply funneled money to Russian oligarchs. However, the United States can at least feign good intentions with these programs.

Not so with the Overseas Private Investment Corporation (OPIC). Ostensibly, OPIC is a taxpayer-backed attempt to spur private sector growth in developing nations. In reality, it’s a front to subsidize big business, and doesn’t try to show that it is anything else. In the name of fostering private enterprise and competition, OPIC insures and doles out huge loans to companies like Citibank, Pepsi, and U.S. Steel for the development of projects in over 140 “risky” countries. Russia, of course, is one of those countries.

The very premise of a state agency mandated to help develop a free market is patently absurd, of course. However, when that mandate is a thinly veiled effort to provide big business with deals they couldn’t get otherwise, this would-be absurd element turns into a justification for genuine paranoia.

According to the OPIC handbook, its mission is “to mobilize and facilitate the participation of U.S. private capital and skills in the economic and social development of… countries in transition from non market to market economies, thereby complementing the developmental objectives of the United States.” This it achieves by providing U.S. companies with political risk insurance, project finance, and investment funds.

This means that projects too risky for commercial banks and insurers to accept fall into OPIC’s lap. Basically, its dual functions are private investment bank and insurer. The only difference is that, as a government agency, everything is backed up with the resources of the U.S. government and, ultimately, U.S. taxpayers.

Since it was founded in 1971, OPIC has turned a profit every year, although occasionally congress appropriates foreign aid funds to expand OPIC’s presence. It currently has reserves of over $3 billion, held in U.S. bonds.

OPIC provides three types of political risk insurance, offering policies up to $200 million per project. Their insurance protects against currency inconvertibility (the inability to convert profits into dollars and transfer them abroad), expropriation, and political violence that results in loss of assets.

The financing arm, which was first commissioned in the mid 1980’s by Reagan and expanded tenfold by Clinton, provides both direct loans and, for loans above $10 million, loan guarantees. Loans are distributed through investment funds. These funds are established by an act of congress and directed by private managers. OPIC provides a loan guarantee for half of the fund, with the rest of the money coming from the private sector. Thus, private banks and investment groups provide the money, but should the loan go bad, the United States will compensate half of the bill. For banks, it is the equivalent of a K-Mart clearance sale. Twice the loan, half the risk. Loans are generally U.S. Government rates plus 2.5 to 5 percent; in other words, market rates.

Of course, they’re not really market rates. If OPIC offered market rates, then corporations would bypass them and go directly to private banks. Dealing with the U.S. government means dealing with a longer review period, more bureaucracy and endless moralizing. The terms would be market rates in a more stable situation, but the fact that private investors don’t offer similar loans means that the rates are actually below market and subsidized by the United States.

OPIC finances up to 50 percent of the costs needed for new projects and 75 percent of the costs for expansions of existent enterprises. Often, they work in conjunction with other international lenders, such as the World Bank and Eximbank. OPIC loans up to $200 million per project, bringing their maximum exposure on a single project to $400 million. Projects receiving OPIC financing can be up to 75 percent foreign-owned.

When considering investments, OPIC is mandated to consider a long list of guidelines. They read like a multinational’s web page. They can do no harm.

OPIC theoretically reviews the economic and social impact each project will have. It should focus on the less-developed areas of the country. No project that unacceptably damages the environment should be funded.

The guidelines also insist that 30 percent of OPIC projects involve small U.S. businesses. But this doesn’t mean mom-and-pop stores. A “small” business means companies with annual revenues of less than $250 million or individuals worth less than $67 million. Thus, even the small business loans and insurance target America’s elite.

Furthermore, while 30 percent of projects are for small businesses, only a miniscule fraction of OPIC insurance and loans are allocated to them. While half of OPIC’s 1999 projects in Russia involved small businesses, OPIC’s exposure to small businesses was one-fifth of one percent of exposure in Russia that year. Obviously, the small business clause is nothing but a weak nod to U.S. rhetoric crediting America’s economic success to small business. The vast majority of OPIC money helps fat corporations get fatter. Reading OPIC’s investment lists is like looking at a page of the Fortune 500. Caterpillar, Cargill and McDonalds have all received tens of millions of dollars in insurance or financing in Russia alone.

OPIC is also mandated to discourage monopolies and not to enter into projects where partners in the host country exert excessive influence on the national government. Apparently, these considerations did not deter OPIC from investing in the Polar Lights project that exports oil from Ardalinskoye field in northern Siberia. Polar Lights is a joint venture between Conoco and LUKoil that, at the time of the loan, was granted rights to export 100 percent of the field’s production through Russia’s oil export pipeline network, in contradiction to Russian norms that generally allow for only 30 to 40 percent of extracts to be exported. Saying that LUKoil does not have political swing defies metaphor. In smaller countries, large American corporations that receive loans can dominate political decision-making in the country.

Another ostensible restriction on OPIC is that it does not finance or insure projects that would harm U.S. trade or take away any U.S. jobs. OPIC claims it has “generated $58 billion in U.S. exports, and helped to create 237,000 American jobs.” However, these statistics are impossible to confirm, as OPIC claims the right to withhold confidential business information within the framework of the Freedom of Information Act. This means that, while they provide information on the companies and projects provided with funds, they refuse to elaborate on what exactly the project entails or even where the site is located.

Still, limited evidence that OPIC does cost American jobs has been found. According to the think tank foreignpolicy-infocus.org, OPIC “insured Kimberly-Clark in 1994, the same year that the Department of Labor certified some 600 of the company’s former U.S. employees as eligible to receive trade-adjustment assistance because of increasing imports from the company’s overseas plants.” The website lists other instances of American job losses that are directly linked to OPIC.

OPIC began its Russia operations in 1992 and has committed over $3.7 billion in political risk insurance and financing since then. Currently, OPIC provides about $810 million in insurance to 46 contracts and has loans valued at $166 million to six projects.

After a slow spell following the 1998 financial crisis (OPIC only sponsored four projects in Russia last year), investors have once again started expressing interest in OPIC’s help. In July OPIC Executive Vice President Kirk Robertson visited Moscow to investigate investment possibilities. Since the crisis, however, OPIC has suspended insurance for currency inconvertibility and does not plan to reinstitute it in the near future. About 20 projects representing about $2 billion in financing are being discussed currently.

In theory, the projects supported should spur investment in Russia and lead to further development in Russia. However, a look at recipients of OPIC money and insurance fails to illuminate how exactly that will happen.

OPIC has primarily financed energy, mining, and financial services in Russia and insured energy, junk food, telecommunications, and financial services. While individual recipients clearly benefit from the money, even OPIC officials seem to be at a loss as to how these projects will help Russia as a whole.

Lawrence Spinelli, OPIC’s Director of Communications, first tried to explain the benefits by describing OPIC as a market-driven entity. “At the end of the day,” said Spinelli, “we don’t give grants. These companies ring our doorbell asking for assistance.”

However, that doesn’t justify why, say, Chase Manhattan Bank in 1996 received a $200 million loan guarantee backed by the U.S. government. It is nothing more than a logical tangent. Just because OPIC doesn’t give grants does not mean that the U.S. government should risk its money securing cheap loans for private corporations.

Spinelli’s next justification was that commercial banks, even when willing to provide loans, generally search for relatively short-term loans. OPIC, however, offers loans that mature in up to 10 years. This again dodges the fact that the United States still has no place bankrolling huge companies that want to enter into a foreign market. These investments won’t spur a grassroots entrepreneurial surge. It is just a corporate handout. No matter what the reasons were for Coke’s need to secure $240 million in insurance for its bottling facilities in 1996 (they got more than the $200 million cap by distributing the money among three different bottling projects), there is no logical reason why the solution to its problems should involve taxpayers.

The next justification of the program was that it a logical continuation of the Marshall Plan. “At the end of the day, OPIC traces its roots to the Marshall Plan,” said Spinelli. He says “At the end of the day” at the beginning of every other sentence. “In the forties, we quickly learned that handing a dollar to Germany had no positive effect. What’s more, it was not adequate.”

There are three logical leaps in this statement: 1. Handing a dollar to Coke does have a positive effect on Russia’s overall economic prospects; 2. Somehow the Marshall Plan, in which the United States injected 1.2 percent of its GNP for five years and earnestly devoted itself to rebuilding Europe’s shattered infrastructure, is comparable to OPIC’s insuring plastic bottles; and 3. OPIC supporting a few multinationals’ projects is adequate to transform Russia into a thriving economy.

It seems like a joke to imply that insuring a few bottling plants, or any of OPIC’s projects in oil extraction, finance, timber, or dairy farming, is an adequate investment in Russia’s infrastructure. $3.7 billion distributed mainly in risk insurance is a pebble tossed in an ocean of need. Russia’s infrastructure needs investments in many things—decent roads, reliable power supply, modern port facilities—few economists list bottling plants among them.

Indeed, beyond assisting individual ventures, Spinelli couldn’t find any real advantages to providing loans and insurance to OPIC’s clients. “Our projects have positive developmental effect—the creation of jobs, and that gives workers money in their pockets,” he said. Obviously, neither of these really effect the macroeconomic situation in Russia. Furthermore, this trickle-down theory directly contradicts OPIC’s claim that it will bring about large-scale change in Russia.

He then argued that, by bringing the first foreign investment to a region, more would follow. However, policy changes, liberal reforms, and investor confidence are what inspire foreign investment, not companies that were given government subsidies to invest.

Finally, Spinelli offered a concrete example of how OPIC can be crucial to attracting more investment. “Often, we will invest in the first foreign hotel in a region, which serves as a beachhead for other potential investors,” he said. Following this logic, what Russia needs is a few more luxury hotels. Perhaps he believes that OPIC’s failure to invest in any Russian hotel projects in the last five years explains Russia’s current difficulties.

“The bottom line,” [as opposed to the end of the day?] argued Spinelli, “is if our clients feel they can get a better deal from a local bank, they go there. But they can’t get it.” This just reiterates that OPIC does not offer market rates, although it claims that it does. At the risk of being repetitive, none of this justifies why the United States should provide subsidies to giant corporations.

But OPIC isn’t concerned with that. Since it has managed to maintain a low profile, it doesn’t need to hide the fact that it is clearly aimed at offering government assistance to the people who need it least.

Nor is it apparently concerned with following its guidelines about environmental impact. While claiming that every project undergoes extensive review, Spinelli held up a Kamchatka mine project that did not receive funding as an example.

However, according to documents leaked to the Environmental Defense Fund, the gold mine had already received environmental clearance from OPIC. Only after EDF mounted a campaign to stop OPIC funding did OPIC drop the project. Soon after, the area on which the mine was to be located was designated an official UN World Heritage Site. The company that lost the funding then filed suit against OPIC for leading the company on. They reached an undisclosed settlement.

The Sakhalin II offshore oil rig in Russia’s Far East is another example of OPIC’s dubious environmental standards. In 1997, OPIC provided a $116 million loan to Marathon Oil (wholly owned by U.S. Steel) for a development involving Shell Oil and the Japanese companies Mitsubishi and Mitsui. The development’s predecessor, Sakhalin I, has repeatedly come under fire from Russian environmentalists for displacing mud from drilling into Russian territorial waters.

OPIC has also been criticized for the selection process of investment funds. Under Bill Clinton, who has made foreign trade a pet project, the number of investment funds increased from two to 24. Many of the managers of the new funds were major fundraisers or donors to the Democratic Party. In 1998, the website opensercrets.org published an article alleging that in 1996, an election year, the sponsors and investors in several funds had attended White House coffees. The article said that one fund sponsor heads a political action committee that contributed more than $50,000 to the Democrats in 1995-96.

Of particular relevance to Russia is the Central and Eastern Europe, Newly Independent States Property Fund ($240 million), which is sponsored by Auburndale Properties and was approved on January 1, 1995. Steven J. Green, a frequent participant on former Trade Commissioner Ron Brown’s trade missions, heads Auburndale. According to a 1995 Business Week article, Brown’s backing won Green the lucrative contract to renovate Moscow’s GUM. Green also contributed $11,000 to the DNC and $1,000 to the Clinton/Gore campaign in 1995-96.

Defenders of OPIC claim that since OPIC has been consistently profitable, it can’t hurt. But they’re wrong. Taxpayers got soaked when the savings and loan industry collapsed. OPIC’s worldwide exposure could force the United States to pay out a huge amount of money to rich corporations.

So far, bad loans and insurance payouts have been minimal in Russia. The Polar Lights venture mentioned above was forced to reschedule its loan payments after poor results. But, after the Russian financial crisis, OPIC’s liabilities have remained low. According to Spinelli, during the last several years, no insurance payments have been made, and the only financing loss is currently in arbitration over a $5 million lost loan.

But whether or not OPIC continues to make money for the United States is irrelevant. Any way you slice it, OPIC’s activities still—at the end of the day—come down to subsidizing rich corporations under the guise of foreign aid. It is not an investment bank, nor do these companies need help. They are already basking in the current economic boom, and should not be provided with cut-rate loans and cheap insurance to help them make even more money. Investment fund managers and sponsors also make a killing through the public subsidies.

Really, the worst part about OPIC is that it has the gall to claim that its mission is to help Russia develop a free market. It is a state agency that distorts the market by providing low rates for investors. What does that have to do with free trade? It simply reinforces the fact that governments exist to prop up businesses.

They don’t even really try to argue that these arbitrary and isolated investments will spur free enterprise development in Russia. Aside from a few nods to supporting small businesses and caring for the environment, OPIC doesn’t even pretend that it is anything but an organization for corporate welfare. And nobody really cares. Apart from an abortive attempt in the House to eliminate OPIC funding in 1996, it goes through effortlessly every two years, when it is subject to approval. OPIC, barring any steep losses, will never get any press and continue to grant corporations extremely favorable deals. Because Americans apparently are only offended by welfare when it helps the poor.

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