Statement of James A. Harmon
President and Chairman -- Export-Import Bank of the U.S.
Senate Banking Committee
Iran-Libya Sanctions Act
October 30, 1997
Mr. Chairman and Members of the Committee:
Thank you for your invitation to appear at this hearing to discuss implementation of the Iran-Libya Sanctions Act (ILSA). I will make an oral statement and submit my written statement for the record.
My name is James Harmon, and I am the President and Chairman of the Export-Import Bank of the United States (Ex-Im Bank), the official export credit agency (ECA) of the U.S. government. Ex-Im Bank is an independent agency which focuses solely on preserving and expanding jobs here in the United States. Ex-Im Bank does this by providing financing that makes it possible to sell U.S. exports in emerging markets where commercial financing is not available or when U.S. exports face fierce foreign government-supported competition.
This hearing involves Ex-Im Bank because the denial of Ex-Im Bank financing is one of the sanctions that the Secretary of State may impose if she determines that sanctionable activity under ILSA has occurred.
Let me say first, I am very concerned about the threats posed to our national security and the safety of our citizens by the spread of state-supported terrorism and the proliferation of weapons of mass destruction. I applaud your efforts to keep this threat in the public eye.
In my statement today I will briefly summarize the role and decision making process of Ex-Im Bank. I will review Ex-Im Bank activity in Russia and the current status of transactions that have been brought to the Bank in which Gazprom is the borrower. And lastly, I will review Ex-Im Bank's role under ILSA.
DECISION MAKING AT THE EXPORT-IMPORT BANK
At the operational level, Ex-Im Bank is market driven. The market brings transactions to Ex-Im Bank for financing and we evaluate the transactions based on the creditworthiness of the borrower. Credit analysis is at the core of the Bank's decision making because of the legal requirement that credit can only be extended if the Bank determines that there is a reasonable assurance of repayment. Ex-Im Bank does not take into consideration foreign policy goals of the government in making its decisions on what exports to support. Ex-Im Bank is not a foreign policy agency and does not have the authority to approve or deny transactions based on their foreign policy import.
The constitutional authority to formulate the nation's foreign policy rests with the President and his chief foreign policy advisor, the Secretary of State. While Ex-Im Bank is not a foreign policy agency, certain legislation gives the President the authority, under certain circumstances, to instruct Ex-Im Bank not to lend to stipulated countries or borrowers. One such law is ILSA. If the Secretary of State determines, under authority delegated by the President, that there is a violation of ILSA, one of the sanctions that she may impose is to bar Ex-Im Bank from authorizing any new financing for U.S. exports to the country or entity in question.
EX-IM BANK ACTIVITY IN RUSSIA
The past five years have been extremely challenging and rewarding for Ex-Im Bank in dealing with the former Soviet Union. It has been a text-book case of balancing the competitive interests of exporters while devising new and creative solutions to protecting the taxpayers' dollars. We have made great strides in helping U.S. exporters win markets and be competitive in the former centrally-planned economies.
We first opened in the Russian Federation in March 1992 on a sovereign risk basis. That is, we looked to the Russian government to back the financing we extended to purchasers of U.S. goods and services.
It soon became clear that reliance on sovereign guarantees would not be sufficient to enable U.S. exporters to reach their full potential in the Russian market. Since Russia was rich in resources that had not yet been fully tapped, we approached the Russian Ministry of Fuel and Energy in May 1992 with the possibility of providing financing on a non-sovereign guarantee basis for modernization of the oil sector. In lieu of government guarantees, we agreed to look for assurance of repayment through the assignment of revenues generated by the export sale of existing production under long-term hard currency contracts. These revenues are deposited into offshore escrow accounts.
By July 1993, we were able to sign the Oil and Gas Framework Agreement (OGFA) with the Russian Ministry of Fuel and Energy, Ministry of Finance, and Central Bank. The first transaction under OGFA was approved in July 1994, and subsequently we have approved a total of 9 transactions supporting more than $1 billion in U.S. exports. And the OGFA structure was proposed in a number of other sectors.
Today, Ex-Im Bank has almost $1.7 billion in export finance outstanding to Russia, with a potential exposure of over $7.5 billion based on outstanding and pending commitments and letters of interest.
THE STATUS OF GAZPROM TRANSACTIONS INVOLVING EX-IM BANK
Gazprom is Russia's natural gas production and distribution company. It is the world's largest natural gas company. Annually, Gazprom transports 22% of the world's total production through a transportation network that includes 87,600 miles of pipeline and 234 compressor stations with 3,700 individual compressor units. Given the scale of its operation, Gazprom represents one of the largest, if not the largest, potential purchaser of natural gas equipment and services and heavy construction equipment in the world.
Gaining access since the breakup of the Soviet Union to Gazprom's market for U.S. exports has not been a simple matter. In 1981, the U.S. government made a large Soviet-Western European gas pipeline the target of U.S. sanctions. For U.S. companies, it meant the loss of a major market during that period. The U.S. manufacturers of heavy equipment like Caterpillar were shut out of the project at great economic loss to the companies. Japanese manufacturers of heavy equipment like Komatsu were elevated to international prominence. In the end, the pipeline was built anyway. For Gazprom, it left a residue of antagonism toward the United States and at the same time created an established supplier relationship between Western European and Japanese exporters and Gazprom. For example, in 1994 alone, SACE, the Italian ECA, approved $1.6 billion in financing for gas turbines. And Hermes, the German ECA, approved $550 million in support for a gas processing plant.
Ex-Im Bank and U.S. exporters had to overcome this history in order to build a successful business relationship with Gazprom. Since 1993, Ex-Im Bank's relationship with Gazprom has included the extension of a direct loan, the signing of a Memorandum of Understanding, and the approval of loan guarantees to finance the export of U.S. products.
The first Gazprom transaction was approved in February 1993 and consisted of a direct loan in the amount of $82 million to support the export of U.S. made construction machinery. That loan was made with the sovereign guarantee of the Russian Federation. If Gazprom fails to promptly make payments required under this loan, Ex-Im Bank would look to the government of the Russian Federation to make the required payments. There is currently a balance of $49.2 million outstanding on this loan.
On November 8, 1994, Ex-Im Bank signed a Memorandum of Understanding (MOU) with Gazprom to make possible a significant expansion of U.S. exports. The MOU provides a framework for guarantying loans up to $750 million for Gazprom's purchase of U.S. equipment and services. The risks to Ex-Im Bank associated with financing under the MOU are mitigated by a special security structure. For each Ex-Im Bank financing, the proceeds of a Gazprom long-term natural gas export contract will be paid into an offshore escrow account. To date, one transaction under the MOU has been approved by Ex-Im Bank. It is in the amount of $134.7 million and it is to support the export of compressor controls. In December 1996, Ex-Im Bank approved two preliminary commitments; one in the amount of $165 million for a horizontal drilling project involving 21 U.S. companies, and a second in the amount of $450 million for specialized industrial machinery.
Presently, there are no transactions ready to come to the Board for a final decision concerning Gazprom.
THE EXPORT-IMPORT BANK'S ROLE UNDER ILSA
Under ILSA, it is the responsibility of the President to determine whether a violation of the law has occurred. The President has delegated this responsibility to the Secretary of State. If the Secretary determines that a sanctionable activity has taken place and that sanctions are warranted, she has a menu of sanctions from which to choose. One of the options that the Secretary may choose is to order Ex-Im Bank not to approve any new export financing.
My understanding is that the State Department is currently investigating the specific facts of the reported agreement for Gazprom to participate in the development of the offshore Iranian gas field. When all of the necessary information is collected, the Secretary will determine a course of action.
Should a determination of sanctionable activity be made under ILSA and should it be decided that the denial of future Ex-Im Bank financing for U.S. exports to Gazprom is the appropriate course of action, Ex-Im Bank will, of course, promptly and faithfully implement this order.
Mr. Chairman, this completes my prepared statement. I will respond to any questions that you or your committee may have.
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