For two years, a group of American public finance experts has been engaged in an advisory role related to the establishment of a new public finance system as part of the evolution of the new structures and new governments succeeding the USSR. These activities have been organized through a nonprofit, United States corporation known as EcoLink.
Obviously, there has been a problem in maintaining a clear definition over this period of time with respect to the governments that would employ the new structures. For the sake of convenience, the author uses the term, Soviet Union, in this article to mean both the central government and the geographic area that existed in the USSR prior to the most recent separation by several republics.
Of course, the dominant economic and governmental area for many centuries, including the period of Soviet rule, has been Russia itself. While it is possible that the new public finance structure will be employed by the future central government that may exist as a confederation or similar form of government, loosely tying several republics together, the projects on which the new public finance system will be based and for which EcoLink has been involved consists of project financings to be employed for public projects within the Republic of Russia, and with a possible extension to peripheral republics. Therefore, the program that will be discussed herafter should be seen in the context of the Republic of Russia, for clarification purposes.
Representatives of EcoLink have made approximately 15 trips to the Soviet Union in support of demonstration projects on which the future public finance system will be based. Initially, the central government provided the impetus and counterparties to the American group. Gradually, local and republic representatives there have become more directly involved.
Bond Issuance in the Soviet Union
Prior to the 1917 revolution, the use of bonds within Russia was quite extensive with various types of commercial activities, such as railroads, raising capital both domestically and on the international marakets. In addition, the Russian government had sold a significant amount of bonds, the so-called Czarist Bonds, prior to 1917. Of course, after the Bolsheviks gained power, the responsibility to make payment on these obligations was abrogated.
The Soviet government used bonds for various purposes during the 70 years of its existence. For example, in 1922, government bonds were issued to farmers as a form of payment for the requisition of agricultural goods; farmers were required to exchange food stuffs for a bond which entitled them to a payment for goods within 10 years.
The Soviet government in the 1920s and 1930s issued bonds to help redistribute funds among state-owned enterprises by taking funds from enterprises that had excess rubles to subsidize those activities that were in a deficit ruble position. During Stalin's tenure in the 1930s, the government issued large quantities of 20-year bonds that yielded no interest and were developed as a way of fighting inflation, as a result of severe shortage of goods. During World War II, 20-year war bonds were issued as a way of paying for the war, and individuals were required to purchase their proportionate share of the bonds. At maturity date, after Stalin's death, Khrushchev then delayed the payment of the bonds for another 20 years, but at the subsequent maturity date, President Breshnev paid the principal to all bondholders. Since interest payments were not made, the value of the bond repayment was, at best, minimal.
Later, other forms of bonds surfaced, such as a "lottery bond" and a "commodity bond." These programs were not popular, lacked the confidence of investors and citizens, and eventually were eliminated.
Recently, with Soviet budget deficits exceeding 10 percent of GNP, the Soviet government decided to sell more than 75 billion rubles worth of long-term bonds to institutional and individual investors. The new bonds paid 5 percent interest, had coupons attached, a call feature and a maturity of 16 years. The bonds were backed by the central government and by the State Bank of the USSR and were distributed by savings bank branches. The bonds sold miserably because the low interest rate was well below the inflation rate of 10 percent or more. As a result, the government raised the interest on the certificates for individuals to 10 percent, which allowed the bonds to be sold more effectively.
The experience of the Soviet system in honoring its debt obligations has again been brought into question as a proposal has been made, and apparently agreed upon, for the external Soviet debt to be restructured by the international holders so that financial and budgetary pressures for the central government can be alleviated. The decision for the government to restructure existing debt has been a highly controversial proposal, both domestically and internationally, since the amount of debt is relatively modest, substantially less than $100 billion, and indicates to the world financial community an evaporating commitment of the government to honor obligations that had very recently been made to the international financial community.
Notwithstanding the internal and external controversy surrounding the decision to restructure the current, external...