Kremlin Calling

The Geneva summit is not the only sign of a thaw in U.S.-Soviet relations. While Ronald Reagan was preparing to meet with Mikhail Gorbachev, a group of American banks was quietly deciding to loan money to the Soviet Union. The First National Bank of Chicago and three New York banks--Bankers Trust, Morgan Guaranty and Irving Trust--have joined the Royal Bank of Canada in giving the Soviets a $200 million credit line to help buy American and Canadian grain. Other U.S. banks are expected to participate in the loans.

American loans dried up after the Soviets invaded Afghanistan in 1979 and President Carter responded by putting strict limits on U.S. grain sales to Moscow. When Reagan lifted the embargo in 1981, the Soviet Union turned mostly to Europe for loans to buy grain. This year, though, the Kremlin began seeking American credit once again. Troubled by seven consecutive disappointing harvests, the Soviets are expected to buy $1.6 billion worth of grain from the U.S. this year.

American bankers were eager to do business with the Soviets because they have a reputation for making debt payments promptly, in contrast to shaky Latin American borrowers. The financiers offered Moscow an unusually good deal. Interest payments will be only one-quarter of a percentage point more than the London Interbank Offered Rate, an international benchmark that currently stands at 8.125%. The bankers are confident that they will not be criticized for giving the Soviets favorable terms. Reason: financially strapped U.S. farmers are in desperate need of boosting their grain sales to Moscow.

The Soviet Union can use new credit because its income from oil exports has dropped as a result of production problems and low petroleum prices. During the first six months of the year, Soviet export earnings in major currencies were only $14.5 billion, down about 23% from the same period in 1984. That is not enough to cover imports, which the Kremlin is reluctant to cut back because it is starting a new five-year economic plan.

One option the Soviets had for raising money was to sell off some of their gold reserves, estimated to be worth $25 billion. But South Africa, whose loans have been cut off by international bankers, is already selling large amounts of gold to stay afloat. Moscow feared that putting even more gold on the market would cause the price to plunge.

The Kremlin thus decided to make up its cash shortage by seeking new loans. Jan Vanous, a Soviet expert at the Plan-Econ research firm in Washington, expects Soviet debt to rise by $8 billion this year. By lending part of the money, American banks will help ease U.S.-Soviet tensions and make some profits in the bargain.