[Congressional Record Volume 146, Number 142 (Wednesday, November 1, 2000)]
[House]
[Pages H11751-H11752]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




    GAO STUDY ON RUSSIAN TRANSITION TO MODERN ECONOMY IS DISPIRITING

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from Iowa (Mr. Leach) is recognized for 5 minutes.
  Mr. LEACH. Mr. Speaker, in June of 1998, the Committee on Banking and 
Financial Services held a series of hearings on financial instability 
around the world, including Russia, whose economy was soon to be 
devastated by the collapse of its domestic bond market and a 
devaluation of the ruble.
  Afterward, I asked the General Accounting Office to conduct a study 
of the effectiveness of U.S. and other western assistance in 
facilitating Russia's transition from a failed Communist-style command 
economy to a modern market economy. The committee's ranking member, the 
gentleman from New York (Mr. LaFalce), joined me in that request.
  The GAO has now completed its works and the findings are disturbing, 
indeed dispiriting. Between 1992 and September of 1998, the United 
States and the West, including the International Monetary Fund, the 
World Bank and the European Bank for Reconstruction and Development, 
provided some $66 billion in assistance to Russia, not counting food 
aid, trade credits and debt rollovers. Of this, the United States 
contributed $2.3 billion in bilateral grants under the Freedom Support 
Act to address humanitarian needs and support economic and 
democratization reform. According to the GAO report which was issued 
today, far from putting post-Communist era Russia on a course of 
prosperity and stability, these funds were largely wasted. Russia's 
economic decline has been more severe and its recovery slower than 
anticipated, the GAO report notes. Progress toward reaching broad 
program goals have been limited.
  The assistance was, in fact, worse than wasted. Because donors lacked 
clear strategy and coordination, as the GAO observes, the money which 
was virtually thrown at Russia contributed to the spread of a culture 
of corruption and the concentration of some of the country's most 
valuable economic assets in the hands of a handful of oligarchs who 
operate on the margin of, if not altogether outside, the law.
  These politically powerful economic groups have had little interest 
in reform. Thus, to a significant degree, western aid programs were not 
only ineffective; they provided fuel to groups that opposed reform.
  Consider the Russian banking system. Donors recognized that an 
efficient and competitive financial system was a basic need if the 
economy was to prosper. To this day, however, 8 years after the 
collapse of Communism and the break-up of the Soviet Union, Russia does 
not have a banking system worthy of the name. There are more than 1,000 
banks in Russia, but their total assets are only about $65 billion, the 
level of a mid-size provincial bank in the United States.
  This is because the Russian public does not trust their own banking 
institutions. Most of these banks, particularly the small ones, exist 
as money laundering platforms to help their clients evade taxes, duties 
and other legal requirements, and to spirit capital to overseas havens. 
More than $100 billion has fled the country, and some estimates place 
the amount much higher.
  The GAO analysis released today underscores an unfortunate but 
inescapable conclusion: The United States and the West missed one of 
the great foreign policy opportunities of this century, to bring Russia 
into the Western family of nations, politically as well as 
economically. Despite the aid, Russia's economic decline was among the 
most severe and its recovery among the most limited among transition 
countries in Eastern Europe and the former Soviet Union. Many Russians 
have concluded that the West deliberately impoverished their country. 
Today only 37 percent of the Russian people have a favorable view of 
the United States, down from some 70 percent in 1993.
  Among the key findings of the GAO report are:
  One, that the U.S. and the West failed to object strongly to the 
corrupt loans for shares privatization scheme that consolidated the 
business empires of Russia's oligarchs.
  Two, Russia's primary motivation of borrowing from the IMF was less 
to stabilize and reform its economy than to become eligible for debt 
relief from the United States and other creditor countries through the 
Paris Club.
  Three, the IMF was pressured by key shareholders to support new loans 
for Russia in 1994 and 1996 in an effort to demonstrate U.S. and 
Western political support for President Yeltsin.
  Four, despite compelling evidence of an absence of the rule of law 
and massive governance challenges, explicit anti-corruption efforts 
have represented a relatively small share of international assistance 
to Russia.
  And lastly, little or no progress has been made in strengthening 
Russia's banking and financial system.
  The recent rise in world oil and commodity prices has improved the 
trade balance of Russia, but continuing capital flight indicates major 
legal reforms have yet to occur. As a result, the business climate in 
Russia is still unfavorable. In a recent strategy review, the EBRD 
concluded, severe weakness in the rule of law continues to undermine 
investment. The power of vested interest to hold back critical reforms 
must be effectively checked. Standards of corporate governance need to 
be strengthened. Without demonstrable progress in these areas, Russia's 
impressive recovery is not sustainable.
  Despite these failures and frustrations, the U.S. cannot afford to 
remain uninvolved with Russia. Stretching across 11 time zones, twice 
the distance from New York to Honolulu, almost halfway around the 
world, Russia is a country without which no serious international issue 
can be resolved.

[[Page H11752]]

  In recent years, some progress has been made in nuclear weapons 
reduction and security; and in April, Russia finally ratified the START 
II agreement. But many other problems remain. Among them is Russia's 
decision to build nuclear reactors in Iran and transfer missile 
technology to that country.
  In this context, the recent revelations that the U.S. and Russia had 
entered into a secret agreement to allow Moscow to continue arms to 
Iran are especially troubling. It would appear that the Clinton-Gore 
administration, in its relations with Russia, chose to abandon the 
principles of progressive diplomacy established at the beginning of the 
century by Woodrow Wilson in his demand for open covenants, openly 
arrived at.
  The still secret Gore-Chernomyrdin agreement not only flouted law, 
but also failed to safeguard our national interest and security. In 
what amounted to an inverted arms-for-hostage deal, U.S. policy was, in 
effect, taken hostage by a Russian arms strategy designed to 
destabilize the Middle East.
  The agreement's apparent purpose was to facilitate a Russian aid 
policy that resulted in the squandering of American tax dollars for the 
benefit of a kleptocratic elite, rather than the Russian people.
  The legitimization of Russian arms sales in defiance of law is hardly 
in the interest of a safer world. The naivete of this approach is 
matched only by the perfidiousness of its execution.
  From an American perspective, it would appear that one of the 
purposes of the Gore-Chernomyrdin Commission may have been to burnish 
the Vice President's foreign policy credentials and make his management 
of U.S.-Russia relations a centerpiece of his potential campaign 
themes.
  It is now self-evident that U.S. policy failed, and the Gore-
Chernomyrdin Commission is a symbol of that failure.
  The question is how the U.S. and the next Administration should 
proceed from here. Though isolationism is always at issue in our 
democracy, the American tradition is dominated by pragmatic and 
compassionate internationalism. Most Americans recognize that what 
happened in Russia, still a nuclear superpower with a seat on the UN 
Security Council, is profoundly important to our national security. A 
peaceful and democratic Russia remains a compelling U.S. interest. 
Consistent with the strong humanitarian strain in our foreign policy, 
Americans maintain an interest in helping the Russian people achieve a 
market economy based on the rule of law.
  America need not turn its back on the international financial 
institutions, but it has an obligation to see that taxpayer resources 
are not squandered, nor used to enrich the few at the expense of the 
many. Americans should continue to be prepared to support genuine 
Russian efforts to help themselves. Here, it must be understood that 
Russia's economy will remain hapless unless the Russian government 
begins to deal effectively with corruption and takes the necessary 
steps to establish an intermediary financial system that services a 
saving public, instead of a thieving elite.
  No nation-state can prosper if it lacks a place where people can save 
their money with confidence and seek lending assistance with security. 
Russia, which is the land mass most similar to our own, has been kept 
back for most of this century by the Big ``C'' of Communism and is now 
being kept back by the little ``c'' of corruption--which may prove more 
difficult to root out than Communism was to overthrow.
  What the Russian people--and those of so many developing countries--
deserve is a chance to practice free market economics under, not above, 
the rule of law. If attention is paid, above all, to establishing 
honest, competitive institutions of governance and finance, virtually 
everything else will fall into place.
  Unfortunately, over the past six or eight years the basics of law and 
economics have been ignored for the sale of the politics of expediency 
and neither the national interest of America nor Russia has been 
advanced by a mistargeted and mismanaged aid program.
  It is time that the symbiotic statecraft symbolized in the Gore-
Chernomyrdin relationship that has legitimized and ensconced crony 
capitalism in Russia be brought to a halt. It is time for the American 
people to insist that their leaders concern themselves with the plight 
of the Russian people rather than the well being of a new class of 
kleptocrats.

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