Cutting China’s Financial Lifeline

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Cutting China’s Financial Lifeline

In 1982, the Soviet Union controlled an empire stretching from Havana to Hanoi, but their hard currency revenue totaled only about $32 billion a year; that was roughly one-third the annual revenue of General Motors, at the time.  More importantly, they were spending about $16 billion more annually than they were making.  Ironically, this funding gap was being financed by Western governments and banks, which acted as the USSR’s life support system.

But this status quo, which had been in place for decades, was about to change.

President Reagan had long believed that the Soviet Union was economically vulnerable; he knew it lacked the entrepreneurship, technological dynamism, and freedom that are the prerequisites of a strong modern economy.  And when he learned that we in the West were financing this brutal regime, he committed to slowing and ultimately terminating, that flow of discretionary cash.

Our European allies had a completely different approach.  Their belief in Ostpolitik, as the Germans called it, presupposed that commercial bridge-building would lead to geopolitical cooperation.  If the West would offer financing and trade to the Soviets, peace and prosperity would result.  Meanwhile, the Soviets were using the proceeds from Western loans, hard currency revenue streams, and technological support to build up their military, expand their empire, and engage in anti-Western activities.

The Reagan administration drew the line on a project called the Siberian Gas Pipeline, a 3,600-mile twin-strand pipeline that stretched from Siberia into the Western European gas grid.  If completed, not only would it become the centerpiece of the Soviets’ hard currency earnings structure, but Western Europe would become dependent on the USSR for over 70 percent of its natural gas, weakening Western Europe’s ties to the U.S. and leaving the continent open to Kremlin extortion.  Moreover, the pipeline was being financed on taxpayer-subsidized terms, since France and Germany viewed the USSR as a “less developed country” (or LDC) worthy of below-market interest rates.

At the time, the U.S. had a monopoly on the oil and gas technology we had developed for Alaska’s North Slope which was needed to drill efficiently through permafrost.  We imposed oil and gas equipment sanctions on the USSR and any European companies that were helping them build the Siberian pipeline.  At one point, despite the strain it placed on relations with our NATO allies, we closed the U.S. market entirely to companies that continued to supply the pipeline project over our objections.  Four of the six companies affected went bankrupt within six months, and the Europeans woke up to the fact that they could do business with us or with the Soviets, but not both...

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