SPEAKERS       CONTENTS       INSERTS    
 Page 1       TOP OF DOC

AN EXAMINATION OF THE RUSSIAN ECONOMIC CRISIS AND THE INTERNATIONAL MONETARY FUND AID PACKAGE

THURSDAY, SEPTEMBER 10, 1998
U.S. House of Representatives,
Subcommittee on General Oversight and Investigations,
Committee on Banking and Financial Services,
Washington, DC.

    The subcommittee met, pursuant to notice, at 10:10 a.m. in room 2128, Rayburn House Office Building, Hon. Spencer T. Bachus, [chairman of the subcommittee], presiding.

    Present: Chairman Bachus; Representatives Roukema, Barr, Weldon, Manzullo, Sanders, LaFalce, Lee, and Hinchey.

    Also Present: Representatives Stearns and Ganske.

    Chairman BACHUS. Good morning. I would like to call together the Subcommittee on General Oversight and Investigations of the Banking and Financial Services Committee. We want to welcome you to this hearing.

    The Clinton Administration has asked Congress to appropriate an additional $18 billion in U.S. taxpayer dollars to the International Monetary Fund. Many claim that the world may be facing an economic crisis and that such a crisis cannot be averted unless Congress gives the IMF these funds.
 Page 2       PREV PAGE       TOP OF DOC

    To avoid a prolonged economic slowdown in the world, giving $18 billion in U.S. taxpayer dollars to the IMF would be appealing—if it were only that simple.

    But of course it is not that simple. Some of the world's leading economists claim that not only can the IMF not save the world, but the IMF has contributed to the current crisis. Among many others, economist Milton Friedman and former Secretaries of the Treasury George Shultz and William Simon, are well known critics of increased IMF funding and oppose an increase in its funding and mission.

    Today the subcommittee meets to examine the IMF's role in relation to Russia. The recent Russian economic crisis has caused jitters around the world and makes this a particularly appropriate time to examine the IMF's record and make an assessment of the situation there. Russia's nuclear arsenal makes its internal stability a matter of utmost importance to the United States and recent events there are a true cause for alarm. It is no longer a certainty that Russia will succeed in its transition to a market economy.

    Russia's problems appear to be first and foremost a direct result of its failure to implement true market reform and installing instead a form of crony capitalism of the sort that has curtailed economic growth in many Asian countries. Nevertheless, we must ask tough questions of the IMF policy concerning Russia—many consider that the IMF has contributed to the problem in Russia. We must ask if the IMF has even been a positive force in Russia. Indeed, it would appear that given the recent events in Russia, it will require some of the best spin doctors in Washington to make IMF policy in Russia appear a success.

 Page 3       PREV PAGE       TOP OF DOC
    Furthermore, it appears more and more likely that the IMF was blind, or possibly even duped, concerning the true state of the economic problems in Russia. Someone was asleep at the switch. In January of 1998, the IMF stated that in regard to Russia that ''the most important battles in securing macroeconomic stabilization and creating a market economy have been won.''

    Yesterday the Los Angeles Times reported that a key architect of Russia's economic transformation now claims that Russia ''conned'' the international community out of nearly $20 billion in loans by hiding the severity of the country's fiscal problems. The paper states that ''Anatoly B. Chubais, who in July negotiated a $4.8 billion loan from the IMF, said in an interview in Kommersant Daily that it was necessary and appropriate for Russia to lie to obtain infusions of cash. If the government had told the truth, the long-time advisor to President Boris N. Yeltsin said in the interview, Russia's economy would have collapsed last spring and global lenders would have stopped dealing with us forever.'' Asked if the Russian government has the right to lie about the country's instability, Chubais replied, ''In such situations, the authorities have to do it. We ought to. The financial institutions understand, despite the fact that we conned them out of $20 billion, that we had no other way out.''

    If this is true, one wonders how the IMF could have reached correct conclusions about Russia. Moreover, if other reports are true that as much as $100 billion of the international aid to Russia has simply been transported out of the country to secure foreign accounts in Switzerland for the benefit of crime bosses in Russia, we may be seeing the first evidence of the largest con job in the history of the world.

    Much of the debate before Congress concerning the IMF has involved economists arguing over theory. We are taking somewhat of a different approach here today. Today's hearing will provide an opportunity to examine an IMF relief package in isolation and the real world effects—both political and economic—of IMF action.
 Page 4       PREV PAGE       TOP OF DOC

    The first panel will consist of Treasury Under Secretary for International Affairs Dr. David Lipton, who will discuss efforts to aid the IMF. In addition, due to a growing problem of Russian corruption and cronyism, we will also hear from Mr. Thomas Kneir, FBI Deputy Assistant Director, concerning Russian official corruption.

    And I might add that Under Secretary Lipton served on the staff of the IMF for several years and I think could give us some special insight into that. He is considered one of our leading experts on Russia and the Far East.

    Our second panel will consist of a group of critics of IMF policy. Professor Peter Reddaway, George Washington University; Dr. Ariel Cohen, The Heritage Foundation; Dr. Mark Weisbrot, Preamble Center for Public Policy. In addition, to provide a Wall Street perspective, we have invited Mr. Jim Rogers, an international investor and author of the book ''The Investment Banker.'' We were notified yesterday afternoon that Irene Stevenson from the AFL-CIO would not be able to appear today.

    Our third panel will consist of two Russian economists, and Mr. Sanders, I am going to ask that you describe that panel during your opening statement, if you would.

    At this time I will turn to Mr. Sanders for any opening remarks that he has and also to identify the third panel. Thank you.

    Mr. SANDERS. Thank you very much, Mr. Chairman.

 Page 5       PREV PAGE       TOP OF DOC
    And I want to thank you personally for holding this hearing. I know that Washington today is abuzz with other issues, but the fact of the matter is what we are talking about today affects not only virtually all of the people in the United States but billions and billions of people throughout the world. And I want to thank you and your staff and my staff and our guests for all of their hard work in making what I am sure is going to be a very, very important hearing.

    Mr. Chairman, as we meet today the world is witnessing a Russian tragedy of historic proportions. Banks are closed. The ruble is rubble. Food is growing scarce and the government in Russia is in disarray.

    For the seven years since the fall of communism, the IMF has been guiding the Russian economy. And tragically, the results are clear. In Russia today we have a few world class billionaires combined with economic collapse, soaring debt, mass unemployment, grinding poverty and unpaid wages and unpaid pensions.

    When communism fell, the IMF prescribed a ''shock therapy.'' This was essentially a Russian translation of the devastating structural adjustment that the Fund imposed on Mexico, Africa, Southeast Asia and other debtor countries. It insisted that Russia cut government spending, sell of their public assets and raise interest rates to attract foreign investment.

    The IMF prescribed that Russia run its economy for the benefit of foreign investors and a few wealthy Russians at the expense of the Russian people. It failed to notice that, as a Polish Deputy Prime Minister Gregorz Kolotko put it, ''The interest of, say, Siberian miners and short-term portfolio investors are even farther apart than the interests of a fish and a fisherman.''
 Page 6       PREV PAGE       TOP OF DOC

    What was the result of IMF-prescribed shock therapy? The impact on the Russian people has been devastating. Between 1992 and 1995 Russia's GDP fell 42 percent, far worse than the contraction that we experienced during the Great Depression that hit this country. So what is going on in Russia today makes our Great Depression look like a piece of cake.

    Even before the current crisis, according to Russian officials, real income plummeted 40 percent since 1991. A quarter of all Russians were living below the subsistence level. Three-quarters were barely surviving on an average income of $100 per month. The average life expectancy for men in Russia declined by seven years to 59, and I am told that that is one of the sharpest declines in life expectancy since literally the bubonic plague. And that is what is going on in Russia today.

    One-quarter of Russia's labor force was receiving its wages late, in-kind, or not at all. Bartering is now a major means of transference in Russia. By August 1, 1998 there were approximately $12.5 billion in unpaid wages owed to Russian workers. Meanwhile, ''privatization'' has been conducted in a way that has concentrated wealth in the hands of a few dozen men known in Russia as the ''oligarchs.''

    According to Forbes Magazine, not usually a source that I use, one of these oligarchs, Boris Berezovsky, a media, oil and banking mogul, had, by 1997, amassed a personal fortune of $3 billion. The economy is falling apart and one man in that terribly impoverished country has amassed a fortune in a few years of $3 billion. He is busily buying chateaux in France for $70 million.

 Page 7       PREV PAGE       TOP OF DOC
    The question is did tens of millions of dollars from the IMF and the American taxpayers help the people of Russia or did it simply help to loot their country? And that is the question that we really have got to debate today.

    On July 20 the IMF agreed to provide Russia $10 billion more in order to claim foreign investors. According to Jeff Sachs, Director of the Harvard Institute for International Development, the reason for such new loans was to ''ensure that the earlier loans are repaid and that the ruble keeps its value long enough for speculators to get their money out without large losses.'' What a wonderful way to spend U.S. taxpayer dollars.

    Unfortunately, even the promise of a $10 billion bail-out was not enough to achieve that noble goal. Those foreign investors had plenty of risky investments on the line. According to a report in the Ottawa Citizen, before the end of August investors had lost more than $117 billion in 1998. George Soros alone lost $3.3 billion. Citicorp faced an exposure of $420 million. Other large losses from banks and financial speculators.

    In spite of their dismal record, the IMF and U.S. Government continue to state that additional bail-out funds should be provided if Russia agrees to continue on the same course. We need to know, and hopefully we will discuss at this hearing, whether such funds will be used to help the people of Russia. Will they be used to help buy baby food for hungry children? Will they pay back the wages that are owed to miners who have worked for months without any wage? Or basically is this IMF funding going to help save the hides of financial speculators and crooks who have increasing power in Russia?

    And if we do pull their chestnuts out of the fire, don't we give these financial speculators an incentive to do the same thing over and over again in Russia and elsewhere?
 Page 8       PREV PAGE       TOP OF DOC

    Perhaps we should listen to the advice of Gregorz Kolotko, who was the Deputy Prime Minister and Finance Minister of Poland from 1994 to 1997. He underwent this transition from communism toward a more free market. And this is what he wrote in July. Listen to what he wrote.

    ''Russia and the International Monetary Fund are throwing hot grease on the fire by insisting on stringent measures in return for a bail-out. It is not paying salaries or pensions. Just to pay the interest on the public debt. In other words, for the illusion of fiscal and monetary prudence, Russia has to kill its own economy and shred its social safety net.''

    Again this is from a high-ranking member of the Polish government who participated in that country's transition, not an academic. He was there. And he continues: ''The most dangerous threat to Russia is a counterrevolution against the market sparked by the growing and justified grievances of its people. The United States and other leading industrial nations, international financial institutions and Wall Street must understand this and not impose another IMF bail-out. This would only create social dissention without addressing Russia's fundamental problems.'' He wrote this in July, before the current crisis.

    The crisis in Russia, coming on the heels of crises in Mexico, Southeast Asia and Japan, has greatly increased fears of a global financial meltdown. Some argue that expanding the funding of the IMF is the best—or even the only way—to forestall such a meltdown, but there is no evidence that IMF intervention does anything to prevent economic crises in the long run. Indeed, as others have argued, the IMF has become a veritable ''Typhoid Mary'', spreading economic austerity and collapse to one country after another, and then we are asked to pour billions more dollars into that issue.
 Page 9       PREV PAGE       TOP OF DOC

    Should we give the $18 billion to the IMF to expand its mission and conduct still further bail-outs in Russia and elsewhere? Before we allow the IMF to impose more misery on the people of Russia or in other countries, we need to ask some very, very hard questions and draw some conclusions about what its policies have contributed to date.

    And Mr. Chairman, I thank you very much for your hard work in organizing this panel. Do you want me to say a few words about the panel?

    Chairman BACHUS. Go ahead.

    Mr. SANDERS. Thank you.

    The third panel will consist of two Russian economists, and forgive me for the pronunciation: Dr. Andrei Illarionov, Director, Institute of Economic Analysis, Moscow, and former chief economic advisor to Prime Minister Viktor Chernomyrdin; and Dr. Boris Kagarlitsky, who is an advisor to the Russian Duma and Senior Research Fellow for the Institute of Comparative Political Sciences, Russian Academy of Sciences.

    Dr. Evgeny Saburov, Director, Institute of Investment, Moscow, and former Russian Deputy Prime Minister and Minister of Economic Affairs, was scheduled to appear but could not make it due to health concerns.

    Thank you, Mr. Chairman.

 Page 10       PREV PAGE       TOP OF DOC
    Chairman BACHUS. Thank you. One reason that I asked you to pronounce the third panel is because I did not know how to pronounce the names, either.

    At this time the subcommittee is going to hear from one of our Members, Mr. Curt Weldon, who returned from Russia on Tuesday, and has attended meetings of the Duma earlier this week. Curt, we appreciate your expertise on this issue and welcome you and invite you to give a statement.

STATEMENT OF HON. CURT WELDON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF PENNSLYVANIA

    Mr. WELDON. Thank you, Mr. Chairman. I want to thank you and the Ranking Member for allowing me to join this subcommittee today in what will be one of the most important debates that this Congress has.

    I returned from my sixteenth trip to Russia on Tuesday evening late and I came away with some reflections that are of great concern to me.

    We have to put this thing in the perspective of ordinary Russians. As I have done in my previous fifteen trips, I sat in my hotel and as I got the bill on the final day I looked at it and I noticed something very strange. The bill in terms of rubles went up each of the days that I was there. I had breakfast one day in the Hotel National, which is a standard price breakfast, and I asked the person at the front desk why on one day it was 500 rubles and on the next day the very same breakfast was 750 rubles and she said, ''Well obviously it is because of the problem with our ruble and its devaluation.''
 Page 11       PREV PAGE       TOP OF DOC

    We understand in America that each day that we sit here and talk about reforms in Russia, the Russian people are seeing a very unreal situation unfold before their eyes. Their bank accounts have been frozen. And when you travel to the streets of Moscow, whether down Taverskiya or the other major avenues or the Old Arbot, you will see people lined up at banks trying to get in to get a small allocation of their savings, which has been denied to them because the banks have frozen their accounts.

    At the same time their accounts have been frozen, prices are escalating dramatically. So that while they have less of their very own resources to spend, the prices before them are increasing to such an extent that it is becoming extremely difficult to live from day to day.

    Now, my own interest in Russia stems from my assignment on the National Security Committee, where I work on Russian issues. In fact, since my days in graduating with an undergraduate degree in Russian and working for the past 20 years on Russian affairs, I have had the occasion to interact with Russian leadership.

    On this trip I interacted with 26 leaders—a dozen Duma leaders from every faction in the state Duma from the LDPR to the communist faction to the Nash Dom Rossiya faction and the regional coalitions, as well—to get an assessment of their perception of what was happening. I had the pleasure of being the only American in the Duma when the debate occurred over Chernomyrdin and he was turned down flatly by a vote of 2-to-1. That was not surprising to me, because right before that event I had met with Mr. Ryzhkov, who is the first deputy speaker for the Nash Dom Rossiya party, Chernomyrdin's party, and he said to me, ''Curt, we will lose this vote.''
 Page 12       PREV PAGE       TOP OF DOC

    In assessing the situation in Russia, we need to understand a very important hard fact of life. We in America, I think, helped provoke the situation in Russia today. We helped provoke it because of our policy, a policy which worked fine as long as Boris Yeltsin and President Clinton were in total and complete control of their governments and everyone looked up to them. Any poll in Russia today shows that Boris Yeltsin would be lucky to receive 20 percent of the vote should an election occur.

    In fact, one of my main concerns in meeting with Deputy Defense Minister Kokosin at the Kremlin on Saturday and Mr. Popkovich, the current chairman of the Duma Defense Committee, was whether or not the Russian military, if a 1998 confrontation occurs, will again this time support the president or this time will break and support the Duma or other factions.

    Unfortunately, the response that I got was not what I wanted to hear. It would not, in fact, be in a position, I think, to provide the stability that all of us want to see in Russia.

    In fact, the situation is very grave. In meeting with military leaders, having dinner with Governor Lebed on Friday evening and speaking with him for two hours about the status of the Russian military and hearing stories of Russian soldiers who are commanding and controlling nuclear weapons who have not been paid for six, nine or twelve months, or looking at retired military officers, some of the best warriors and soldiers in the former Soviet army, who are today feeling betrayed by the motherland, who have not been given pay and pensions and housing and who feel as though the betrayal is real. We need to understand that we need to assist Russia, but in a new way, and I think the opportunity is ripe.
 Page 13       PREV PAGE       TOP OF DOC

    I went to Moscow for one very important purpose—to see whether or not we could find some common ground. Because, you see, the interesting situation today, Mr. Chairman, is the Duma opposes IMF funding, just as many in the Congress oppose it.

    Now, you have to ask why it is that Duma opposed continued funding through the IMF. Well, it is for two reasons.

    The first is the same concern we have. The Duma has seen hundreds of millions and billions of dollars go down ratholes and end up in Swiss bank accounts, in Riviera real estate investments, in U.S. real estate investments, and have seen the seven oligarchs that my colleague referred to, rape the Russian people with huge amounts of money that have not benefited and helped create a middle class. That has got to stop.

    But the Duma also must understand there is a second reason why they have opposed IMF funding, but that they need to reverse themselves on. They do not want to make all the tough reforms necessary.

    Now, back in July they did make some significant reforms, but they left the toughest ones to the administration in Russia to try to deal with, which has been impossible. And we need to understand that there is an opportunity for us in the Congress to seize, with the Duma, to say to them, ''We will help you reform the way money goes into your country, we will help you create that middle class, we will help you get this money away from the oligarchs, but in return, you must self-implement the very difficult reforms nationally and in the regions that are so necessary for free markets to succeed in Russia.''
 Page 14       PREV PAGE       TOP OF DOC

    And to that end, Mr. Chairman, I think we have reached an historic agreement. In negotiating with the leaders of the Russian Duma, I came back with eight principles that the Russian Duma has told me they will pass on the same day that this Congress would consider replenishing the IMF dollars.

    These eight principles I will enunciate, probably not here today, because you probably do not have time for me, but they basically say we will not, as two parliaments, allow business as usual to continue in terms of Russian financial stability. We will not allow additional money to go to corrupt oligarchs. We will, in fact, require reforms to precede dollars coming in. We will focus on successful regions Oblast and Krai, where reforms are taking place every day, where private land use, where opening up markets and controlling budgets are happening to benefit real Russian people.

    We will form a joint interparliamentary commission made up of staffs from the American Congress and the Russian Duma who will be able to analyze where every dollar from the IMF and the World Bank and the U.S. Government ends up, not just where it is supposed to go, but where it ends up. And we will ask the IMF to establish an international blue ribbon task force to reform itself, because, as George Soros told me in a meeting I had at his office in New York before going to Russia, the IMF itself is a part of the problem and it needs to make the necessary reforms to understand how it can better serve people in Russia and people around the world where IMF funding is going today.

    In addition, we recommend that Congress and the Administration, with the cooperation of American business leaders, go in and make specific recommendations to failed business enterprises in Russia so that, in fact, they can be assisted in terms of getting their priorities and their activities back in order.
 Page 15       PREV PAGE       TOP OF DOC

    And finally, Mr. Chairman, we recommend a massive, three-year initiative to begin to bring 15,000 Russian students to American graduate and undergraduate economic development institutions where they can study financial systems, economic systems and the free market activities that have made this country so successful and take those recommendations back to Russia. A requirement of that recommendation would be that those individuals must go back to Russia upon receiving their degrees.

    You know, the Duma is not to blame here, although they have some fault that I have mentioned in terms of reforms. For the past year the Duma has worked diligently with this Congress in a bipartisan way to establish the first housing mortgage program in Russia, and that is this document I hold before you today, Dom Dlya Vashey Semey. The idea of this initiative is to take money that is provided by the IMF and the World Bank and, at low interest rates, not 15-, 20-, 40-percent interest, which is what the banks in Russia charge today, but at interest rates below 10 percent, allow average Russian families to borrow money for 30 years so they can own a piece of that country, so they can realize a piece of the Russian dream.

    We in America must understand that while we have been putting $600 million a year into Russia, much of which I support, in the form of cooperative threat-reduction money, the Nunn-Lugar program, in the form of economic assistance, most of the Russian families have not seen any benefit in their quality of life.

    Sure, the purpose of this money is important—destroying nuclear weapons—but we need to understand that we have to help Russian people. Russian families need to have more food on the table, need to have the stability and the ownership that Americans feel.
 Page 16       PREV PAGE       TOP OF DOC

    And so, Mr. Chairman, I ask your very important subcommittee to help play a lead role in making sure that this Congress and this Government do not repeat the fallacies of the past six years. We need to help Russia. We need to help the IMF and the World Bank get their act together. But we need to set the parameters in the Congress. Working with the Duma, I am convinced that we can do that.

    A 21-year-old girl working in the hotel where I was staying gave me, I think, the advice when I asked her whether or not Russia would succeed and survive through this terrible turmoil, as I told her about my information relative to the Russian military being brought into Moscow at that very moment in case of insurrection and she said to me, ''Congressman, we have a saying in Russia.'' [Russian sentence.] ''Russian people have a deep soul and we will cope with this situation.''

    It is just an absolute tragedy that we have helped cause the situation in Russia today. Thank you.

    Chairman BACHUS. Thank you, Mr. Weldon, for that excellent testimony.

    I will say to the panel and to the public attending this hearing today that Chairman Jim Leach will continue to look at the economic problems which have spread from East Asia to Russia to other developing nations. We realize how grave it is and we realize that it is essential for Congress to examine the implications of this economic instability on our policy, on the American people and on this country.
 Page 17       PREV PAGE       TOP OF DOC

    And we will continue to do that. Next Monday and Tuesday Chairman Leach will hold public hearings on a world in economic turmoil. Invited to testify before the committee next Monday and Tuesday will be representatives of the Department of State and Treasury, the Federal Reserve Board, the Federal Bureau of Investigation again, the Central Intelligence Agency and financial institutions, as well as economists and academics.

    The subcommittee held hearings earlier this year on the international economic situation, including testimony on crony capitalism. Conditions in the Russian economy and the involvement of the Russian mafia were the subjects of hearings by the full committee in 1996.

    And Chairman Leach said this in announcing our hearings next week: ''The committee will continue its review of the degree to which so-called crony capitalism and outright corruption have contributed to the current international crisis. The downfall of the ruble, as well as the weakening of so many Asian economies, is more related to corruption than to any other factor. It is the moral and legal underpinnings of the international order that are most in need of strengthening.'' And I applaud Chairman Leach for those remarks and look forward to those hearings next Monday and Tuesday. And Mr. Weldon, we would certainly invite your participation at those hearings.

    Mr. WELDON. Thank you.

    Chairman BACHUS. One of our Members who participated in our hearings back in 1996 and is an active Member of the full committee and subcommittee Chairman, Mrs. Roukema, is here today. Mrs. Roukema, I know you have an intense interest in this and I would invite you to make a statement.
 Page 18       PREV PAGE       TOP OF DOC

    Mrs. ROUKEMA. Thank you, Mr. Chairman. I do have an intense interest, although the Financial Institutions Subcommittee does not have the exclusive jurisdiction; we have an overlapping jurisdiction on this subject with Mr. Castle's subcommittee.

    And I will not take up a lot of time but I would ask that my full statement be included in the record with also the specifics of the reforms that were proposed by the full committee when we passed some months ago reauthorization for IMF.

    And I want to say today I cannot speak with the authority, of course, that Congressman Weldon has spoken on the specific case study that we have before us today, namely the Russian problem and what the Russian situation is now teaching us, but I thought it was very important for me to be here to listen and then apply, to whatever extent necessary, new reforms beyond what the subcommittee may have already taken under consideration.

    But in any case, I must say whether we do those reforms through subcommittee action or on the Floor, I will say unequivocally that what we have learned, not only through the Russian experience, but also the Asian experiences is one: they are case studies and we need reforms; two, and perhaps in my mind most importantly, that we do need to recapitalize this IMF.

    And it is not foreign aid. It is not for their interest. It is the mutual interest of the global economy, of which the United States is a leader.

    And so I must say that I am deeply concerned that we take appropriate action in a timely manner. I hope we are not going to string this out that much longer in terms of congressional action. And I am not speaking for Chairman Leach. I am most pleased and encouraged that we are going to continue hearings next week that I think can be instructive and constructive in terms of getting this issue wrapped up in the Congress and the recapitalization taking place under whatever conditionality and reforms are necessary.
 Page 19       PREV PAGE       TOP OF DOC

    But we need it. Our economy needs it. Our workers need it and certainly the health of the global economy needs it, because there is the potential for greater collapse out there, additional collapse, and we must act responsibly.

    Again, I want to thank you for this hearing, because it is extremely important to know—and, by the way, the conditionality of tough reforms that Congressman Weldon referred to, that is absolutely necessary in terms of how the IMF conducts its business, not only in Russia, but throughout the world. But we cannot have business as usual. We have to have these reforms and recognize that it is in our self-interest and that there is an expediency here for congressional action. And I thank the Chairman for this hearing.

    And I would appreciate it if I can enter into the record with specificity the reforms that were enunciated in our legislation, as passed by the full Banking Committee.

    Chairman BACHUS. Without objection.

    We are going to hear from Representative Stearns in just a minute, but before I recognize you, Mr. Stearns, Mr. Weldon, I would like you to introduce for the record the suggestions of the Duma which you have worked with.

    Mr. WELDON. Will the gentleman yield?

    Chairman BACHUS. Yes.

 Page 20       PREV PAGE       TOP OF DOC
    Mr. WELDON. I thank the gentleman. I will ask unanimous consent to enter into the record eight principles that I negotiated with leaders of the various factions in the state Duma led by Deputy Soy. He has had discussions with Speaker Seleznev in the state Duma and has assured me that if we, in fact, agree to these eight principles, the Duma will pass them, which would be an historic event, that our two parliaments would come together and make parameters that basically address the reform issue and the issue of the need to continue funding free market reforms in Russia. So I thank you.

    Chairman BACHUS. Thank you. And that was without objection.

    Chairman BACHUS. Mr. Stearns.

    Mr. STEARNS. Good morning and thank you, Mr. Chairman. I want to thank you for the opportunity to speak. I am not a Member of the subcommittee but I have followed this issue, with others, and I would like to——

    Chairman BACHUS. And you have also participated in our earlier hearing.

    Mr. STEARNS. I sure did.

    There is a book by Michael Novak called ''The Spirit of Democratic Capitalism.'' It talks about three things that are needed for a country to succeed if it hopes to replicate what has been done in America or to have a successful capitalistic society.

 Page 21       PREV PAGE       TOP OF DOC
    The first, of course, is the ownership of property and free markets and all that entails. The problem we have seen in Russia, in addition to corruptness, is their not willing to go that extra step in the free markets.

    The second thing is you have to have a democracy. I think they have a democracy and I applaud them for what they are doing.

    The third thing, they must have a culture of honesty and respect for individuals and their property and they must have enforcement of the rule of law, and I think that is where it is falling down.

    So I look forward to these hearings, Mr. Chairman. The goal of these hearings should be to find out what went wrong in Russia and how the IMF's policies have affected the current economic state in Russia.

    Now, a very disturbing comment was recently given by the Secretary of the Treasury Robert Rubin. He was quoted as saying, ''At this point we don't have a Russian economic team. We don't have a Russian economic plan.'' Now, that is unbelievable, at this point, that we do not have in place a Russian economic plan or team.

    So if anything, Mr. Chairman, if this hearing can move us toward a better understanding of the policies in Russia and a better understanding of the IMF's impact, you will have done this Congress, and particularly Russia, a great service.

    There are two other points I wish to make. A recent columnist has talked about some of the problems in Russia and his name is Jim Hoagland. He recently wrote a column entitled ''Russia, a System that Prevailed and Failed.''
 Page 22       PREV PAGE       TOP OF DOC

    What he said was that ''The fundamental problem in Russia, as well as Indonesia, Malaysia and elsewhere, was that in adopting American-style capitalism, the problem was, the nations did not go far enough to adopt what we have here.'' Russia demonstrates the perils of trying to skim off the cream of the globalized economy without adopting the checks and controls needed to restrain human appetites and ambition. Lacking in Russia and Asia was an appreciation of the open and fair competition needed to police capitalism and to make it work.''

    And I think that is the key today. When we go back to Michael Novak's book that talked about the democracy in place and the free markets, we also must have the ability to police capitalism and to make it work by the enforcement of the rules.

    I want to bring to your attention Mr. Chairman, a graph that I brought with me. If my staff would just bring the graph and show it, I think we can all see it. It basically comes from a recent report from Newsweek, August 3, in which they talked about looting of Mother Russia. Experts show on this particular graph that in a typical scheme, the sellers, who are aided by Russian corrupt officials, sell Russian commodities overseas for higher prices than the report that is given to the government and pocket the difference.

    And, as you can see, with crude oil, with petroleum products, natural gas and aluminum, they are basically looting Russia through corrupt sales, by not reporting the proper amount to the Russian government and the Russian government should step out and police this operation and stop it in its tracks, because there is no reason for this to continue. Russia has to step up and develop this culture of honesty and this culture of enforcement of the rules, which Michael Novak talked about.
 Page 23       PREV PAGE       TOP OF DOC

    In conclusion, Mr. Chairman, all of us want to help Russia. If there is anything we can do here in Congress and America to do so, we should do so, and we should have an open debate. But frankly, I am very concerned that the IMF policies have not fulfilled their prophecy and I think before we send any more money over there, we have to have Russia implement whatever—whether it is Curt Weldon's eight-stage plan or whatever—we must come up with a consolidated, concrete plan before we put any more money in Russia. Thank you, Mr. Chairman.

    Chairman BACHUS. Thank you, Mr. Stearns.

    Mr. Ganske has got the last opening statement before we go to the panel.

    Mr. GANSKE. Thank you, Mr. Chairman. I will be real brief. I am here to listen and learn. I am not a Member of your subcommittee, but I appreciate very much being able to sit on your panel today for a while.

    The headlines in the newspapers read $22.3 billion lost in Russia from the IMF loans. I think before Congress decides to vote for additional funds, we need to learn more about what went wrong with those loans and whether, in fact, corrective changes can be made to make it work better so it doesn't happen in the future.

    So I look forward to hearing from your panel members today. And thank you again for being able to sit on your panel. I yield back.

    Chairman BACHUS. All right, at this time we will have our first panel. The first member of that panel is Dr. David Lipton. Dr. Lipton serves as Under Secretary of the Treasury for International Affairs and as such, he assists the Secretary on all aspects of international economic policy.
 Page 24       PREV PAGE       TOP OF DOC

    Prior to this appointment, he served as Assistant Secretary of the Treasury for International Affairs and he held that position since December of 1995. He focused on international economic policy coordination, on economic and financial relations with both industrial and developing countries, and U.S. policies with respect to the International Monetary Fund and the Multilateral Development Banks.

    He began his career at Treasury in the spring of 1993 as Deputy Assistant Secretary for Eastern Europe and for the former Soviet Union. So he is well qualified to discuss the Soviet Union and Russia's problems today.

    During that time he worked to design and implement U.S. policies to assist countries in that region in their transition to market-oriented economies and to secure multilateral backing from the G7 and international financial institutions for that process.

    From 1989 until 1992, he worked under the auspices of the United Nations Development Program and the World Institute for Development Economics Research. And not insignificantly, from 1981 until 1989, he was an economic adviser to the governments of Russia, Poland and Slovenia. Actually, that was after 1989. And from 1981 to 1989 he was an economist at the International Monetary Fund.

    He holds a B.A. from Wesleyan University and both a Master's and a Doctorate in Economics from Harvard University. So at this time, Dr. Lipton, we welcome you and ask you to make an opening statement.

 Page 25       PREV PAGE       TOP OF DOC
STATEMENT OF DR. DAVID A. LIPTON, UNDER SECRETARY FOR INTERNATIONAL AFFAIRS, DEPARTMENT OF THE TREASURY

    Dr. LIPTON. Thank you very much, Mr. Chairman. I am grateful for the opportunity to discuss recent developments in Russia at this important hearing. This is a subject of great interest to this subcommittee, Members of Congress and, more broadly, here in the United States.

    United States policy toward Russian economic reform has been and will continue to be a subject of vigorous debate in Congress and elsewhere. But there can be little debate about its importance. Russia's transition to a market democracy is one of the defining economic challenges of the end of the 20th century. The outcome will help define the shape of the 21st century global economy and the progress of democratization around the world.

    Let me start by putting the present crisis in the context of Russia's longer-term transformation effort. I will then discuss what the U.S. Government and the international community have done to try to promote Russia's economic transition and then I will end with a few words about the prospects for the future.

    Mr. Chairman, for nearly seven years the Russian government has struggled to lay the foundations for a stable and prosperous market economy amid the wreckage of the Soviet system. There have been numerous setbacks and disappointments, but reformers did achieve some successes: significant privatization, price and trade liberalization, deep cuts in military spending and capital market development.
 Page 26       PREV PAGE       TOP OF DOC

    But, as time went on, other critical reforms lagged. Principal among these was the failure to control the budget deficit and government borrowing. Russia's budget problems are best understood, I believe, as a manifestation of the political struggle over the country's economic direction. The budget is a battleground for disputes about the proper role of government and about resource allocation. Everyone wants spending and subsidies and no one wants to pay taxes.

    As these disputes went unresolved, budget difficulties continued and borrowing continued. That borrowing starved the incipient Russian private sector of capital.

    Also critical was a failure to build and institutionalize a favorable investment climate and the rule of law which would be necessary for Russian business to take hold. This kept much of the economy off the books, under-monetized, vulnerable to crime and corruption and dependent on barter.

    Russia's problems intensified during the past ten months as a number of factors combined to put pressure on the exchange rate: continued Russian policy failure, periodic debilitating political uncertainty, contagion from Asia leading to a worsening in investment sentiment, and slumping oil and gas prices. Political paralysis prevented the last government, the Kiriyenko government, from forging a political consensus in favor of fiscal restraint and reform that might have strengthened investor sentiment. In the end, opposition to reform and deteriorating market conditions triggered a breakdown in confidence.

    No longer facing any easy choices, Russia's authorities then decided on an enormously risky course of simultaneously devaluing the ruble, imposing a debt moratorium and restructuring government bonds. This was the Russian government's decision and not one we supported. It should not be viewed in any sense as a precedent or a guide for future policy responses in other emerging markets under pressure. Those regrettable actions have played out in a manner which has deepened the crisis of confidence, unleashed spending, lending and inflationary pressures and prompted the change in government—in short, the situation that Congressman Weldon described earlier. Russia's crisis has become one of grave political and economic dimensions.
 Page 27       PREV PAGE       TOP OF DOC

    Mr. Chairman, following 1992, Russia's cooperation with the international financial institutions produced an important economic transformation and fragile stability. That stability has now evaporated, but this dramatic setback should not obscure that Russia is a different country with a different economy than it was in 1992.

    First, much economic activity has been put in private hands after 70 years. Private property and profit are no longer universally regarded as evils.

    Second, there has been a dramatic demilitarization in Russia. Last year Russia's military spending was only one-seventh its peak Soviet level from 1988 and two-fifths its 1992 level.

    Third, an economy which had been cut off from the world for most of this century has been opened up to trade, investment and technology. Between 1992 and 1995, in cooperation with the IMF, Russia dramatically reduced import duties to an average of 15 percent with a 30 percent ceiling.

    Fourth, prices generally reflect market forces, something that did not happen before 1992. The incredibly wasteful resource allocation of the Soviet system, which flowed from unrealistic communist pricing, has been curbed dramatically.

    Fifth, Russia developed a private banking system and private capital markets. The IMF fostered monetary and exchange policy reforms which conquered hyperinflation and spurred financial sector development.
 Page 28       PREV PAGE       TOP OF DOC

    Those accomplishments, though important, were accompanied by a number of continuing weaknesses and problems. Russia's banking sector never developed into a strong intermediator for channeling savings into productive private investment. The terms of privatization were frequently not competitive and private ownership often failed to improve company management. Corruption has remained pervasive and fundamentally undermines people's faith in the legitimacy of the political and economic system.

    Russia still does not have a properly functioning land market, and use of land as collateral has been stifled. Social payments are not adequately targeted and the truly needy often receive little or no support.

    It was in this setting that this summer the Kiriyenko government mapped out a reform strategy. That strategy, as supported by the IMF, was to cut spending, especially unproductive subsidies, while building a new tax system capable of raising revenues adequate to finance a very reduced level of Federal spending. The IMF program also supported cuts in Federal Government noninterest expenditures by 20 percent this year.

    Deficit cutting was not the extent of the Kiriyenko government's reform horizon. It also included plans to make the privatization process more transparent and open, to cut substantially the number of strategic firms exempted from privatization, accelerate reform in the banking and energy sectors, eliminate noncash payments for utilities and infrastructure, increase capital market transparency, strengthen measures to enforce shareholder rights, and improve bankruptcy laws and enforcement.

 Page 29       PREV PAGE       TOP OF DOC
    The rationale for the $22.6 billion additional multilateral financing package that was mobilized in July was to provide measured, conditional assistance to support these reform efforts and, by helping Russia withstand intense financial pressures, give it more time to continue reforms.

    We supported this financing because we believed there was a reasonably good chance—not a certainty, but a reasonably good chance—that reform would move forward. This judgment was based on important steps taken, largely in the form of decrees to cut Russia's federal deficit. There was every indication that the government intended to continue the course of essential reforms. If the IMF had not acted quickly to support key elements in the government's anti-crisis program, it and we would have been rightly criticized for timidity and for a failure to seize a critical opportunity to support reform and attempt to stabilize Russia's economy.

    Of course, it would have been vastly preferable if the Kiriyenko government had been able to forge a broad political consensus in favor of the full program of fiscal restraint and reform, but the reality is and has been that there is strong opposition in the Duma and elsewhere from powerful special interests and, in part, from those who seek to return to a form of communism. In this sense the origins of this financial crisis are fundamentally a political struggle over the economy's direction.

    The periodic setbacks in Russia's progress lead inevitably to the question of what the multilateral community should have done or should do to help Russia improve its economic performance. Historians will debate whether too much or too little Western assistance has been provided since the collapse of the Soviet Union. Some observers now charge that while large amounts of financing were promised to Russia in this decade, little was actually disbursed. In fact, most of this financing was disbursed, although the international financial institution lending was delayed as reforms lagged.
 Page 30       PREV PAGE       TOP OF DOC

    There has been no lack of willingness on the part of Western governments to support credible Russian reform. Some argue that the IMF support has been too forgiving of Russian policy failures. The truth, I think, is that IMF support has been delayed or cut, in fact, five times when the Russian government has not met its commitments. Moreover, since 1992, Russia's poor policy performance in key areas has led to ever-tighter conditionality. Russia was the first country to have monthly monitoring as part of an IMF program, with monthly tranching of disbursements.

    With regard to the most recent IMF loan announced in July, disbursement of funds was based on completion of a long list of prior actions, which included new tax administration procedures and a budget code, more uniform application of the value-added tax, including application to barter transactions, a simplified small business tax and a range of other actions.

    Because two of those actions were not taken, the IMF executive board cut back the size of its July disbursement by $800 million. IMF financing has and must remain strictly tied to fulfillment of policy conditions.

    We very much share the concern in Congress, the concern that already has been expressed here today, about corruption in Russia. So do the international financial institutions. It is a fundamental threat to Russia's stability, democratization and the prospects for a broadly shared rise in living standards in Russia. And there is a real risk that corruption will mistakenly be blamed on reform.

 Page 31       PREV PAGE       TOP OF DOC
    Much corruption in Russia is related to government economic and regulatory policy. Below-market value sales of government assets to favored oligarchs, protection payments extorted from firms in the informal sector, the prevalence of barter rather than cash payments to avoid the punitive tax system, violation of minority shareholders' rights, bribes extorted by some government officials—those are all related to policy and regulatory failures. These are precisely the failures that the IMF has been trying to correct through its support for competition, tax reform, improved corporate governance, more firm and government transparency and disclosure, stronger bank supervision and restraints on the discretion and scope of government regulation.

    Chairman BACHUS. Dr. Lipton, at this time, according to the rules of the House, we have to recess for a vote because we are under five minutes. We will resume this hearing in approximately 15 minutes and at that time we will let you conclude your statement and hear from Mr. Kneir.

    [Recess.]

    Chairman BACHUS. The hearing is called back to order. At this time, Dr. Lipton, we will allow you to continue with your statement.

    Dr. LIPTON. Thank you, Mr. Chairman. I have just a short concluding section on prospects for the future.

    Today Russia's future lies shrouded in uncertainty. Neither the composition nor the aims of the new government can be known with any confidence and I would certainty hesitate to predict here.
 Page 32       PREV PAGE       TOP OF DOC

    What is clear is the grave risk if Russia fails to set the economy back on the reform course. The reform agenda now confronting Russia is formidable. It combines the urgent need to restabilize and the imperative of laying the foundation for growth and improvements in living standards. By devaluing and restructuring debt, Russia has taken drastic steps to cope with failed policies. Russia's authorities urgently need to clarify those steps and begin a dialogue with creditors.

    At the same time, Russia must resist pressures to spend and lend, which will doom the economy to another bout of high and perhaps hyperinflation, robbing ordinary Russians of the real value of their savings.

    Beyond restabilization, it must chart a long-term growth strategy based on reform, creating an environment in which business and investment can flourish.

    Mr. Chairman, Russia faces a choice: to restart, accelerate and deepen reform or to drift in a dangerous policy direction. The pressures at this moment are all for spending, subsidies, intervention, and so forth, to provide relief from the perceived hardships of reform. But, as President Clinton said during his visit to Moscow, there is no shortcut to developing a system that will have the confidence of investors around the world. These are not American rules or anybody else's rules. These are the rules of the global economy.

    We all have an interest in Russian economic success and the President made clear that the Administration is ready to offer further assistance if and when Russia presses forward with reform. Thank you, Mr. Chairman.
 Page 33       PREV PAGE       TOP OF DOC

    Chairman BACHUS. Thank you.

    The second member of our panel is Mr. Thomas Kneir, FBI Deputy Assistant Director. He will testify concerning Russian official corruption.

    And we have asked you to testify, Mr. Kneir, because there is a growing problem of Russian corruption and cronyism. We know that the FBI has been active, has a presence in Russia, and we look forward to your testimony.

STATEMENT OF THOMAS J. KNEIR, DEPUTY ASSISTANT DIRECTOR, ORGANIZED CRIME/DRUG BRANCH, CRIMINAL INVESTIGATIVE DIVISION, FEDERAL BUREAU OF INVESTIGATION

    Mr. KNEIR. Good morning. Thank you, Mr. Chairman, and Members of the subcommittee. I would ask that my entire statement be submitted for the record and I will try to summarize the statement.

    Chairman BACHUS. Without objection.

    Mr. KNEIR. I am pleased to appear before you this morning and thank you for the opportunity to discuss the FBI's law enforcement initiatives related to the Russian Federation. In particular I am prepared to provide you with a law enforcement perspective of public corruption in the Russian Federation.

 Page 34       PREV PAGE       TOP OF DOC
    Presently our investigative efforts in this area are spearheaded by five criminal investigative squads which specialize in the area of Russian organized crime. These squads are located in Los Angeles, Miami, New York, Philadelphia and San Francisco. As of this date we have approximately 240 active investigations nationwide involving strictly organized crime or racketeering activity. In addition, we have approximately 100 active investigations involving emigres from the former Soviet Union who are involved in other types of criminal activity, primarily in the area of white collar fraud and other violations.

    Many of these investigations involve an active exchange of information and criminal intelligence between the FBI and our law enforcement counterparts within the Russian Federation and the other republics of the former Soviet Union. This activity is coordinated by our FBI legal attache offices which are presently located in Moscow, Kiev, Ukraine and Tallinn, Estonia.

    In July 1994, as part of the FBI's overseas expansion program, the FBI opened a legal attache office in Moscow, Russia. This had become necessary due to the gradual increase in racketeering and other types of criminal activity by a very small minority of emigres from Russia and other parts of the former Soviet Union. The vast majority of these cases were being opened in our largest offices and, in response, the previously mentioned squads were established.

    The emerging problem followed a pattern similar to that established by other immigrant groups which arrived in the United States. Included among the overwhelming majority of honest, hard-working individuals seeking a new life of enhanced opportunity was a small faction of hard-core criminals of the type who exist in every society. In some cases these individuals were affiliated with known organized crime groups headquartered within the Russian Federation or within other areas of the former Soviet Union. Their presence within our borders necessitated an increased level of cooperation and a more frequent exchange of information with our counterparts in the Russian law enforcement establishment.
 Page 35       PREV PAGE       TOP OF DOC

    Since 1994, the case load of our legal attache office in Moscow has grown from 35 cases to over 375 cases. As of this date, some 660 investigative leads from domestic U.S. field offices have been covered in Moscow and elsewhere in Russia with the assistance of our Russian law enforcement counterparts. Many of these investigations have resulted in significant criminal proceedings involving violent extortion attempts, kidnappings, multimillion dollar fraud schemes against Russian and U.S. banks, as well as other frauds perpetrated against financial institutions, commercial ventures, public institutions in both the United States and in Russia.

    The FBI in 1997 established additional legal attache offices in Kiev, Ukraine and Tallinn, Estonia. To date, these offices are experiencing an ever increasing caseload similar to that experienced in our Moscow office.

    As a result of the success of our direct liaison efforts in Russia, the Ukraine and Estonia, the FBI has proposed opening a regional legal attache office within the Republic of Kazakhstan in order to cover the Central Asian republics.

    I would like to discuss the issue of public corruption within the Russian Federation as it is viewed from the FBI's perspective.

    The Russian people, along with the Russian law enforcement establishment, share our disdain for corrupt public officials. Russian citizens and high government officials alike have acknowledged this problem and have expressed outrage at the sinister impact that official corruption is having upon their society and body politic. Corruption allegations and investigations are frequently media topics throughout Russia, and public corruption is an unfortunate fact of life for the average Russian citizen.
 Page 36       PREV PAGE       TOP OF DOC

    Corruption matters, for the most part, are vigorously and thoroughly investigated by the Russian law enforcement establishment to the extent that prevailing Russian law allows. The primary agencies involved in these investigations are the Ministry of Interior or the MVD, the Federal Security Service, the FSB, and the Federal Procurator's Office. For them, there is no higher priority than the issue of public corruption. As a whole, the Russian law enforcement establishment has taken a firm stand against all types of official corruption and has taken various steps intended to combat corruption.

    Most law enforcement agencies within the Russian law enforcement establishment have experienced at least some degree of internal corruption. The Ministry of Internal Affairs or the MVD, by far the largest law enforcement agency in Russia, has candidly acknowledged the problem and has undertaken strenuous efforts to eradicate corruption within its ranks. They have recognized the fact that before a law enforcement agency can effectively deal with public corruption within the society at large, it must, as a first step, deal effectively with the corruption within their own ranks.

    In response to this difficult problem, former Russian Internal Affairs Minister General Anatoly Kulikov implemented an anti-corruption campaign within the MVD called Clean Hands, which was designed to identify corrupt officers within the ranks. According to MVD statistics in 1997, more than 11,000 internal affairs employees had been placed under investigation for corruption and related offenses. Of this number, nearly 1,800 were fired from the ministry and about 400 were demoted in rank. An additional 5,000 employees are said to have received disciplinary reprimands.

 Page 37       PREV PAGE       TOP OF DOC
    Also during General Kulikov's tenure an internal investigative unit was established and charge with removing corrupt officers from the MVD and with the handling of citizen complaints. This original cadre of this unit, which consisted of 60 officers, was trained at the FBI Academy in Quantico, Virginia in those investigative techniques associated with internal corruption.

    Included among MVD personnel placed under investigation in the recent past in connection with allegations of corruption are high-ranking generals and street cops alike. Several high-ranking officers within the MVD have thus far been prosecuted for corruption-related offenses. These anti-corruption programs are continuing.

    With respect to other government and commercial sectors impacted by corruption within the Russian Federation, the picture is not so clear and it is difficult to assess. The existence of official corruption is regarded as a serious criminal problems for which the Russian government has devoted an increasing amount of resources. In order to increase the number of available investigators, in 1995 the Federal Security Service or FSB was given concurrent jurisdiction, along with the MVD, to investigate organized crime and corruption matters. These agencies are extremely serious in their efforts to uncover corrupt officials and would vigorously disagree with any suggestions to the contrary.

    In addition, the Russian government has drafted new legislation designed to modernize their criminal code in the areas of money-laundering and other types of financial fraud.

    Corrupt public officials and organized criminals use each other in the pursuit of profit. Known organized groups with virtually unlimited financial resources are known to utilize bribery as a means of achieving their criminal goals. Within the Russian Federation, bribery of public officials is considered by the MVD and the FSB to be a deeply rooted criminal problem. In the Russian Federation, organized crime groups are known to have provided money-laundering and other services to corrupt public officials in their effort to illegally transfer state monies or properties.
 Page 38       PREV PAGE       TOP OF DOC

    The FBI has been involved in several sensitive joint criminal investigations with the MVD and FSB which involve the possible corruption of Russian officials. These investigations have been very revealing regarding the scope and level of this problem.

    One such investigation was opened in our San Francisco division in 1994 and continues on today. This particular investigation, which was recently reported in the U.S. News and World Report, centered upon a company known as Golden ADA. The firm was ostensibly incorporated for the purpose of processing precious gems, including diamonds, which were to be imported from Russia. The principal subject of this investigation included one Andrei Kozlenok, a Russian national with ties to high level officials in the Russian Federation.

    It appears that Kozlenok and his business partners, in collusion with high level government figures in Russia, utilized Golden ADA more as the golden calf. Although established for the stated purpose of procuring and distributing Russian diamonds on the world market in order to generate collateral for U.S. bank loans, Golden ADA became an effective mechanism for looting the Russian treasury. Through high level contacts in Russia who had access to vast government repositories of raw diamonds, gold, objects of art, Golden ADA received shipments of these precious goods not by the pound but by the ton. Most of these materials ultimately disappeared. Estimates of the loss experienced by the Russian treasury varies as this case continues to be assessed. However, there are estimates around $170 million lost.

    During the course of this investigation, FBI special agents from the San Francisco Division worked closely with an investigator from the Russian MVD who had traveled to San Francisco in connection with the FBI's Practical Case Training Program. The FBI and MVD both benefited from the exchange, as each gained valuable insights into each agency's investigative techniques and methodologies.
 Page 39       PREV PAGE       TOP OF DOC

    This particular investigation revealed a pattern of criminal activity which is consistent with other similar fraudulent schemes originating within the Russian Federation—that is, the utilization of front companies in order to establish a facade of legitimacy, the exchange or transfer of large amounts of cash, the fraudulent manipulation of banking and business records, the opulent lifestyles displayed by the principals, the involvement of corrupt government or commercial individuals, the fear of violent retribution for cooperation with the authorities and almost always a suggestion of use of enforcers at some level.

    The Golden ADA investigation has recently gained additional momentum with the arrest of Kozlenok in Athens by Greek authorities. He has been extradited to Moscow, where he remains in custody and the investigation continues by the MVD. We understand that additional Russian subjects, including former high level government officials, are also under investigation.

    Yet another similar investigation which was conducted jointly by the FBI and Russian MVD involves large scale bank fraud and embezzlement matters which was initiated by our Los Angeles Division in 1994. This investigation, also which remains active at this time, involves the theft of approximately $60 million from business interests, government institutions, banks and more than 4,500 bank depositors in Moscow during the period of 1991 through 1994.

    The main subject of this investigation, a former maintenance worker in Moscow, received a license from the Russian Central Bank to operate a banking institution in Moscow. This bank, which came to be known as RVG Bank, was a fraudulent enterprise from its inception. The operators of the institution created a public image for RVG as a legitimate and prosperous banking enterprise, which allowed them to attract large investments, not only from individuals but from other banks, government institutions. And also the Academy of Science of Russia was one of the depositors.
 Page 40       PREV PAGE       TOP OF DOC

    Through a series of false loans to front companies established worldwide by the main subjects, they completely looted the bank's assets. Millions of dollars found their way to the United States, where the main subject had established residency and had purchased millions of dollars in real estate in the Los Angeles area.

    During this investigation FBI special agents from the Los Angeles Division traveled to Moscow to confer directly with MVD counterparts and acquire evidence. In support of this matter, MVD investigators traveled to our Los Angeles office where they were able to observe the manner in which the FBI conducts its portion of the investigation. This exchange of investigators was once again made possible by our Practical Case Training Program. As a result of this investigation, civil forfeiture proceedings were initiated against the main subject's property in the Los Angeles area and certain funds were recovered. These funds will soon be returned to the Russian Federation.

    This investigation is continuing in Los Angeles and in Moscow and is expected to expand in view of the arrest of the main subject recently in Russia. By the way, in this case the Academy of Science of the Russian Federation lost $600,000 of their $638,000 that they put into this particular bank. Also, a total of 4,500 individual depositors lost more than $20 million collectively.

    The investigation I have discussed represents the evolution of an increasing effective law enforcement partnership between the FBI and Russian law enforcement establishment which has provided for our mutual benefits.

 Page 41       PREV PAGE       TOP OF DOC
    In addition to the assignment of special agents to liaison duties in Russia, the FBI has encouraged the continuing exchange of investigators for both training and operational purposes. Russian police officers have participated in street surveillances side by side with our agents in the United States and have testified in our courts and before our grand juries. In several instances they have assisted in the monitoring of court-authorized wiretaps and in the preparation of affidavits for those wiretaps.

    The FBI has also expanded its training program for Russian officers and during the last four years we have trained more than 2,000 Russian officers. We have conducted more than 60 seminars in Russia and other areas of the former Soviet Union. With the assistance of the Department of State, the FBI continues to conduct these seminars and, as we speak, two FBI training teams are prepared to depart for Russia where they will be conducting training at MVD academies in the areas of economic crime, police ethics and internal police controls.

    FBI special agents have taught at police academies all over Russia. In addition, Russian police officers graduated from our FBI National Academy program at Quantico, Virginia.

    An exceptional productive initiative which has already been mentioned is our practical case training program. Under this program, Russian officers receive on-the-job training during the conduct of an actual investigation jointly with FBI agents. In 1994 Russian MVD officers traveled to our New York office and participated in a joint investigation targeting Yvacheslov Ivankov. I am with you on these Russian names. I have a hard time, too.

    Ivankov, a violent career criminal and major organized crime figure, led an international crime organization with operations in the United States and Canada. The Russian officers made a significant contribution to the ultimate success of this case, which resulted in Ivankov's eventual conviction for extortion. During this investigation Russian officers also gained valuable insights into FBI investigative techniques and evidence-handling procedures. They also observed the operation of our U.S. court system and again this practical case training has been very successful in our cooperation with our Russian law enforcement partners.
 Page 42       PREV PAGE       TOP OF DOC

    We also have additional initiatives in the area involved in the International Law Enforcement Academy or ILEA in Budapest, Hungary. The instructors at ILEA represent a genuine cross-section of U.S. law enforcement, to include experts from the FBI, the Drug Enforcement Administration, the Internal Revenue Service, the Bureau of Alcohol, Tobacco and Firearms and U.S. Customs Service.

    In summary then, it is clear that public corruption is a high priority issue for the Russian law enforcement establishment. The FBI will continue to support Russian law enforcement efforts in this area through a combination of operational and training programs. We seek to expand our cooperative efforts with the MVD, FSB and Procurators Office in the field of international crime. This relationship has come a long way from the cold war era when the prospect of FBI agents working hand in hand with Russian police officers would have been regarded as unbelievable. Thank you.

    Chairman BACHUS. Thank you, Mr. Kneir.

    At this time we are going to have questions for the panel and we are going to institute the five-minute rule. We will have a second round of questions for anyone who wants to ask additional questions but we are going to try to stick close to the five-minute rule.

    Dr. Lipton, my first question for you is press reports have indicated that the $4.8 billion IMF payment to Russia in July was ''essentially wasted by Russia in its attempt to prop up the ruble.'' Do you agree with that assessment?

 Page 43       PREV PAGE       TOP OF DOC
    Dr. LIPTON. It is the case that IMF monies are lent to the central banks and, in this case, to the Russian Central Bank and in the weeks following that particular loan, the pressures against the ruble continued. The Central Bank found that day after day people were coming forward, selling rubles and buying dollars and in their attempt to support the ruble, roughly that amount of money was spent.

    So the money was used in what turned out to be a failed attempt to keep the ruble stable. It was their aim to avoid devaluation and at the end of the day they failed in that endeavor.

    Chairman BACHUS. The second installment is due in September. What assurances do you think we will get from the Russians before we make that installment? And do you see that installment as going ahead at this time?

    Dr. LIPTON. We think it is premature to be discussing any of the details of further monies from the international community to Russia, in light of the fact that there is an acting prime minister today. A new candidate for prime minister was named by President Yeltsin.

    In our view there would have to be quite a number of steps taken by a new Russian government to establish that Russia was returning to a strong and credible reform course before there could be serious consideration given to disbursing further funds.

    Chairman BACHUS. Thank you.

 Page 44       PREV PAGE       TOP OF DOC
    My second question, I read Stanley Fischer's remarks on January 9 when he gave remarks at Harvard University. Stanley Fischer, to those who do not know it and for the record, is the first Deputy Managing Director of the IMF. He said, ''In summary, Russian economic reform is entering a less dramatic phase than that of the last few years. The most important battles in securing stabilization and creating a market economy have been won but much remains to be done to secure the future growth of the economy.

    ''Up to this point the optimists on Russia have been more right than the pessimists. There is good reason to believe the optimists will continue to be right.''

    Dr. Lipton, looking at that statement from today's perspective, what do you think of the IMF's track record in assessing the Russian economy? And do you think that we in Congress can trust, or the country as a whole can trust, the IMF now to accurately assess the economic issues facing Russia?

    Dr. LIPTON. I share with you a sense of the tremendous irony in the remarks that you cited. It is the case that Russia had made some significant progress in stabilizing its economy. It had made some important progress in reducing budget pressures.

    I think just at about the time that those remarks were made, the ruble was under significant pressure as the crisis from Asia was beginning to hit Russia. They had responded in what seemed at the time to be a constructive response by trying to raise interest rates and protect their hard-won stability.

    I think the irony of that statement is that in the subsequent months, they did not act to solidify that fragile stability. They did not take steps to resolve budget problems and show, as other countries that were affected by the contagion, that they meant business.
 Page 45       PREV PAGE       TOP OF DOC

    I think that in general, our assessment of the IMF is that it has been a constructive force in Russia, that many of the objectives that I think have been enunciated here by Members of the subcommittee are objectives that can really only be reached through the creation of a market economy and the entrenchment of democracy in Russia. And furthermore, the things we would all like to see—increased living standards for ordinary Russians, an end to the whittling away of their savings through inflation—all of those things are objectives we share. Our view is that what the IMF has been trying to do have been efforts in an attempt to achieve those objectives.

    I think that it is clear now that the attempt to maintain stability and to entrench reform has been dealt a dramatic setback. I think it is principally a failure of the Russian political system to generate a strong cohesion behind a reform path and I continue to believe that this was a sensible strategy for the IMF to be promoting. It has turned out, in light of events, to have failed.

    Chairman BACHUS. OK, thank you. My time is up.

    Mr. Sanders.

    Mr. SANDERS. Thank you very much, Mr. Chairman.

    Did I hear you just say that you thought that by and large the IMF has been constructive for Russia? Is that what I heard you say?

 Page 46       PREV PAGE       TOP OF DOC
    Dr. LIPTON. What I said is that I think that the kind of reforms that the IMF has been promoting have been the right kinds of reforms and, in that sense, it has been constructive.

    Mr. SANDERS. I am sorry to interrupt if I can, Dr. Lipton, but time is short. Let me read you very briefly from an article that appeared in The Nation magazine recently by Steven Cohen, a professor of Russian. You may know him. He is an authority on Russia.

    This is what he says. ''Russia's underlying problem is an unprecedented all-encompassing economic catastrophe, a peacetime economy that has been in a process of relentless destruction for nearly seven years. GDP, gross domestic product, has fallen by at least 50 percent and, according to one report, by as much as 83 percent; capital investment by 90 percent and, equally telling, meat and dairy livestock herds by 75 percent. Except for energy, the country now produces very little. Most consumer goods, especially in large cities, are imported.

    So great is Russia's economic and social catastrophe that we must now speak of another unprecedented development, the liberal demodernization of a 20th century country.''

    When the infrastructures of production, technology, science, transportation, heating and sewage disposal disintegrate, when tens of millions of people do not receive earned salaries, some 75 percent of society lives below or barely above the subsistence level, when male life expectancy has plunged to 57 years, malnutrition has become the norm, how in God's name can you talk about the IMF, which has been the guiding light for the Russian economy, doing anything constructive when we are looking at something almost ahistorical—the collapse of a modern society?
 Page 47       PREV PAGE       TOP OF DOC

    Would you really go before the people of Russia today, on their television, and talk about the ''constructive role'' that the IMF has played?

    Dr. LIPTON. I share with you and with the author of that article distress over the conditions in Russia. I think that in very large measure in the early years after the dissolution of the Soviet Union, the huge decline in production and in some senses in living standards that have been pointed to are a result of the collapse of communism.

    I think that in the period 1992 through the end of last year it is the process of reform that offered promise to overcome some of those abject conditions and I think that it is really the lack of carrying forward reforms rather than too much reform that has been the problem.

    You cited earlier, Congressman Sanders, the example of Poland. If you look at Poland, the Czech Republic and Hungary and compare that to events, say, in the southern tier of Central Europe, you see that in those countries that followed the reform path and were supported by the IMF, smaller declines in production and more rapid——

    Mr. SANDERS. But Dr. Lipton, what did the fellow who helped engineer the Polish transformation say about the IMF's role in Russia? Did you hear what I read? He disagreed. He thought that we were adding grease to the fire by continuing along the present path.

    Let me just mention to you, has the IMF been equally successful in Asia, in Indonesia, in Thailand, in South Korea? Have they also been successful in those countries?
 Page 48       PREV PAGE       TOP OF DOC

    Dr. LIPTON. Well, I think that the record in those countries has been a mixed one. Those have been very severe crises with new features—the collapse of crony capitalism that had not been seen before.

    Mr. SANDERS. How many billions of dollars did the United States and the IMF pour into those countries in the midst of crony capitalism and massive corruption in the Suharto regime, for example?

    Dr. LIPTON. I do not have the figures.

    Mr. SANDERS. Many, many billions of dollars.

    Dr. LIPTON. It is a lot of money.

    Mr. SANDERS. But would you tell this subcommittee now that you think the IMF's role in Asia has been also equally constructive?

    Dr. LIPTON. I believe that during the period of crony capitalism, the IMF attempted to support reform of a kind that I think we all should be pleased about. I think that in the wake of the collapse of crony capitalism, the IMF has played a constructive role in trying to put those countries right and help them dismantle crony capitalism, although I can see——

    Mr. SANDERS. With all due respect, the IMF supported the Suharto dictatorship for many, many years and I do not know how you can talk about helping to dismantle crony capitalism. They were supportive of that dictatorship.
 Page 49       PREV PAGE       TOP OF DOC

    You also state that in Latin America and Central America, the IMF and World Bank have led countries to sustained growth and stability. I have a letter here which I would like to introduce into the record from the head of the second largest party in Mexico talking about the horrendous economic conditions in Mexico directly related to the IMF policies. Thank you, Mr. Chairman.

    Chairman BACHUS. Without objection.

    Mr. Manzullo, the gentleman from Illinois.

    Mr. MANZULLO. Thank you, Mr. Chairman.

    Dr. Lipton, I have a rather simple question. If the United States Congress votes billions of dollars of more funds into the IMF for use in Russia and if the Russian Duma accepts the eight principles that Congressman Weldon set forth, which I assume some of those obviously deal with transparency, cartels, and so forth, what type of safeguard measures are there within the IMF to make sure that in the increments of infusions which are put into the Russian system that these reforms, presuming they are adopted into law in Russia, would be put into effect?

    Dr. LIPTON. There are some and there are some that we are working to put in place and would like to work with Congress to see put in place.

    First, in the case of Russia, as I said, I do not see a restarting of IMF support unless and until Russia begins a program of reform that is worthy of support and I think at this point Russia seems quite undecided in its economic direction.
 Page 50       PREV PAGE       TOP OF DOC

    So I think that you can be assured that any monies that the IMF has or that might come from this quota increase will not go to Russia unless and until Russia is carrying out again a meaningful monitorable reform path and that the monies will be tranched so that disbursements are measured with the pace of reform.

    More generally there are a set of steps that we are working on to modernize the architecture of the international financial system that is being designed by the group of 22 countries that Secretary Rubin called together—it includes G7 countries and emerging market countries—in the areas of improving transparency, improving the Fund's capability to supervise, help countries improve their banking systems—we have seen that banking system failures have played a prominent role in the crises from Mexico to Asia to Russia—and in the important subject of seeing that the private sector plays an appropriate role in the resolution of crises, that we do not have bail-outs; we have bail-ins of the private sector.

    Mr. MANZULLO. How is that done effectively? I agree with everything you said and I appreciate the fact that no more American dollars will be going into Russia until these reforms are started. But here is a nation that has just come out of communism and it is experimenting with the capitalistic system. We all want to see Russia succeed, not only because of our own interest in trading with Russia, but because we want to encourage democracies so that there is political, economic, and religious freedom.

    But how effectively do you do that without actually having somebody from IMF or the United States virtually be in charge of some of the departments?
 Page 51       PREV PAGE       TOP OF DOC

    Dr. LIPTON. I think that you are right that this is difficult. We see now from the history in Russia the risks that we take when we try to put our weight and the weight of the international financial community behind reform. We try to be careful, to back sensible policies. We try to be careful to mete out the funds, measured with the pace of reform.

    We hope that this kind of support will help strengthen the process of reform but, as we now see, there can be dramatic and quite dangerous setbacks. I think that one of the lessons we will draw from this is to be ever more careful in the case of Russia in the design of programs, to see that there is enough comprehensiveness to the program and enough actions taken before funds are disbursed to have suitable protections of the kind that you are referring to.

    Mr. MANZULLO. Thank you.

    Chairman BACHUS. Thank you, Mr. Manzullo.

    At this time we will go to a Member of the subcommittee from California, Congresswoman Barbara Lee. Congresswoman, I want to commend you for your work on the subcommittee and for your contribution to this hearing and invite your questions.

    Ms. LEE. Thank you, Mr. Chairman. I want to thank you very much for the timeliness of this hearing. It is very important that we hear what these issues are in today's current economic environment, in terms of our international crises which we are dealing with.

 Page 52       PREV PAGE       TOP OF DOC
    Let me just say that I recognize, and I think many of us do, that the stringent measures of the IMF have not assured the economic benefits to the Russian people. And, as a result, we do see massive unemployment and poverty and dislocation of workers.

    But now we are hearing from Mr. Kneir about the massive corruption and criminal activities taking place in Russia and I am wondering if any of the IMF loans, if any of this money has gone to support any of this corruption or any of these criminal activities and, in fact, what type of stringent requirements do we place with regard to us not allowing for any of the IMF monies to go toward corruption and criminal activities. Is that stated in our IMF loan policies, as all of the other measures are stated?

    Dr. LIPTON. That is a very important question. The IMF money lent to the Central Bank has, in the case of Russia, been kept there to try to establish credibility and confidence in the ruble. And for the most part, during the first several years, the reserves were not spent.

    In the course of this year, as people had doubts about the stability of the ruble, they defended their exchange rate by selling foreign exchange to people who came forward to demand foreign exchange, in essence betting that this defense of the ruble would fail.

    There is no way to know exactly who got how much money. There were ordinary Russian citizens in that category. There were Russian businessmen. There were Western businessmen who had brought money into Russia and decided to take money out at some point in the course of the year.

 Page 53       PREV PAGE       TOP OF DOC
    There is another aspect of IMF involvement, however, that runs directly to the question that you have asked about corruption and that is that the policy reforms that the IMF is trying to encourage and that it conditions its support on—collecting taxes from companies that would like to keep the proceeds of their business and park the money in banks or outside of the country, in trying to create the rule of law, to improve the regulatory system and bring about improvements that will make corruption both more difficult and something that enforcement can deal with.

    Ms. LEE. But let me just say, though, given the fact that the IMF has spent billions of dollars, what type of prohibitions up to now or what type of measures have we taken up to now to at least ensure that none of the IMF money went to support these activities, given the other types of stringent measures that we place on Russia which affect people in Russia in terms of their livelihoods and the economy?

    Dr. LIPTON. Well, the strictures are to monitor on a monthly basis the placement of these monies at the Central Bank and to monitor their spending and if the monies are being used to ask for changes in policies to stem the decline in the use of international reserves.

    But, as I say, this is a market economy and their defense of an exchange rate like Argentina's or Hong Kong's or any other country, involves selling foreign exchange into the marketplace to keep the ruble stable, and it is really not possible to monitor exactly who is buying foreign currency in the market and for what purpose.

    Ms. LEE. So we really do not know.
 Page 54       PREV PAGE       TOP OF DOC

    Dr. LIPTON. In that sense we do not know.

    Chairman BACHUS. Thank you, Congresswoman Lee.

    At this time Maurice Hinchey, a Member from New York who has actually been participating in our earlier hearings and has spoken out, do you have questions?

    Mr. HINCHEY. Thank you very much, Mr. Chairman. I appreciate the opportunity, although I am not a Member of this subcommittee, to be here with you today. Thank you for affording me this chance to participate.

    I also want to thank you for holding this hearing. I think it is very, very timely and it could not be on a subject of greater importance to our future.

    It is coincidental today that there are large numbers of people from the United States steel industry here in the Capitol. They are workers and executives and owners of steel plants and they are deeply concerned about their future. They are deeply concerned about it because large amounts of steel produced in other parts of the world are being shipped to the United States at below production costs, being sold here at below production costs. They are asking the Government to take some action to protect them against this practice.

    It is, I think, a consequence of the fact that consumption in many countries, East Asia, Eastern Europe and Russia particularly, have declined dramatically. And I think that it would be a mistake to focus on the activities of the International Monetary Fund in its application to its resources and responsibilities to Russia and not focus at the same time on this larger picture. The Russian problem is very much a part of this larger picture.
 Page 55       PREV PAGE       TOP OF DOC

    Would you agree with that, Dr. Lipton?

    Dr. LIPTON. Yes, I do agree with that. I think that the Asian crisis, now the Russian crisis and the manifestations of this crisis around the world have caused many changes in commodity markets and in markets for manufactured goods which are having an effect on the United States.

    The one that you mentioned, Secretary Rubin met with CEOs and labor leaders from the steel industry very recently and shared his concern with them about their particular industry but I think generally speaking, one of the reasons we want to fight this crisis and the crisis in Asia and we would like to see the resources of the IMF replenished is to be able to bring the financial crisis to an end, to see countries recover, see commodity prices recover and see trade patterns return to normalcy.

    Mr. HINCHEY. Well, that would be certainly a very welcome thing because absent that, it seems to me that we are looking at some very difficult economic times ahead. Manufactured materials, everything from chemicals to steel to computers are a glut on the marketplace presently. Commodities, agricultural commodities and other commodities, are also finding a difficult time in the marketplace and prices are continuing to drop.

    If that continues, that downward spiraling of disinflation is going to be a very difficult problem for us indeed and we need the International Monetary Fund I think more now perhaps than ever before in the history of the Fund. The economic circumstances that we are confronting now globally are similar to those which gave rise to the creation of the International Monetary Fund in the first instance.
 Page 56       PREV PAGE       TOP OF DOC

    Do you think that is correct, Dr. Lipton?

    Dr. LIPTON. I agree with that. I think that this crisis is different in many respects from what we saw in the 1930's but I think it is dangerous, dangerous for the world economy and dangerous for the U.S. economy. The gyrations in the Dow-Jones are enough to show us that we are not immune to events abroad and we should be very careful to do all we can to try to help countries recover.

    Mr. HINCHEY. Let me just say finally in my last 30 seconds or so that the problems in Russia are not, in my view, attributable to the International Monetary Fund, although some of the things that the IMF has done are certainly questionable. It would be much better if the IMF were more accessible and if Mr. Camdessus would make himself more available to this subcommittee and this subcommittee and to other Members of this Congress. I think that that would go a long way toward alleviating some of the fear and suspicion that exists here on Capitol Hill with regard to their activities, and you would not have to be the one who comes here defending them.

    But the root causes of the Russian crisis are not the activities of the IMF. The root causes of the Russian crisis are the collapse of communism and the failure of that country to adopt to market forces. And it is not a surprise that they have failed thus far to adopt. They have never had any experience that would lead them in that direction. This is an economy that has always, since the days of Alexander and before, been dictated from the top down, all through the communist period, as well.

 Page 57       PREV PAGE       TOP OF DOC
    So it is not surprising that they are unable to adapt to market forces. They are going to need an awful lot more time and a lot more help to be weaned off communism and onto a more market-oriented system, and I think that the IMF is critical in that regard to helping them make that transition.

    Thank you, Mr. Chairman.

    Chairman BACHUS. Thank you, Mr. Hinchey.

    Dr. Lipton, Anatoly Chubais was the lead negotiator for the Russians in negotiating the IMF package and the July payment by the IMF of about $4.8 billion. I read with interest his remarks that were published in the Los Angeles Times yesterday, where he said that Russia duped the IMF into making that payment.

    Were we duped? Was the IMF duped?

    Dr. LIPTON. I read that report with very great concern and we have been in touch with the IMF to ask them to go back and look over all of what they did with the Russians this summer, to look into that question.

    The IMF has many ways to verify the information it receives and the judgments that it receives from a country's authorities, including Russia. They have practices for an instance where they find that a country has misrepresented itself.

    Let me say on the specific article, I went and looked at the actual transcript of the Kommersant interview that you referred to and that the L.A. Times story referred to and others may have a different interpretation; I construe the article itself quite differently than the L.A. Times.
 Page 58       PREV PAGE       TOP OF DOC

    Chubais was asked a question about whether President Yeltsin had been improper in suggesting on a Friday that Russia would not devalue and then having a decision taken about that over the weekend. He was asked whether it is OK for a country to conceal policy deliberations about a very dramatic change in policy course in the midst of a crisis situation.

    Different countries have different view about how they treat that, but what I read him as having said was that he considered that not being open about that in public and with the IMF in the course of those days was acceptable.

    But if there are any misrepresentations of fact, of economic policy or of the use of resources that are uncovered by the IMF, we would expect those to be treated under the rules that they have for such circumstances.

    Chairman BACHUS. And I use the word ''duped,'' ''duped the IMF.'' Actually, the Los Angeles Times quoted him as saying that they conned the international community.

    Now, the Los Angeles Times did point out that Chubais actually was given a transcript of his remarks before they were published and that he raised no objection to them. Members of the subcommittee looked up that word which was published in the Los Angeles Times and actually the word ''tricked''——

    Dr. LIPTON. No, I think that is right. The question is whether he was referring to the negotiation in July that led to the $4.8 billion drawingthat you are speaking about or communications with the IMF the weekend of the devaluation subsequent to which there has been no IMF disbursements and I do not know which it is and I think the IMF should look into which it is.
 Page 59       PREV PAGE       TOP OF DOC

    Chairman BACHUS. I would like to address this question to Mr. Kneir but really, Dr. Lipton, if you have a comment, too, I will follow up with a question for you.

    The U.S. News and World Report recently did a story on Golden ADA, which you testified about. They have this quote in the story: ''The FBI learned even more from its informants. Golden ADA was but one of a series of schemes to plunder Mother Russia. 'One group was involved in stealing timber, oil and precious metals,' said one agent. 'Others were involved in gold and diamonds. At the center of it stood Kozlenok.' The value of the goods shipped to Golden ADA equalled $178 million but taken together, the various schemes added up to more than $1 billion,' Kozlenok told the FBI.''

    Is that statement accurate, Mr. Kneir? Is Golden ADA but one of a series of schemes to plunder Mother Russia?

    Mr. KNEIR. The Golden ADA case is still a pending matter, so we cannot really talk too much about it, but there have been a number of schemes where natural resources have been basically taken from Russia and transferred out of the country.

    Chairman BACHUS. And are those schemes rampant in Russia or was this an isolated incident?

    Mr. KNEIR. We have worked a number of cases with our counterparts over there. We have worked a number of high level schemes and I do not know about ''rampant.'' A number of schemes have been uncovered.
 Page 60       PREV PAGE       TOP OF DOC

    Chairman BACHUS. I notice that according to the report in the Golden ADA case, the Russian head of the Committee on Precious Metals was implicated. He was later pardoned.

    Can such schemes go forward or be carried out without government officials being involved?

    Mr. KNEIR. Let me answer that in general terms. Many times you almost need an insider or no rules and regulations or anybody watching for a scheme like this to operate.

    Chairman BACHUS. Thank you.

    Do you communicate with the IMF or the Treasury on your investigations?

    Mr. KNEIR. Not as a practice.

    Chairman BACHUS. Not as a practice, OK.

    Dr. LIPTON. Could I add to that? The one area where there has been a collaboration has been in the area of fighting financial crime, where there have been Treasury people involved with the FBI effort in Russia to stop money laundering.

    Chairman BACHUS. Would both of you agree that there needs to be more cooperation and communication between the FBI and the Treasury and the IMF?
 Page 61       PREV PAGE       TOP OF DOC

    Mr. KNEIR. Absolutely.

    Dr. LIPTON. Yes. We would welcome working with the FBI in trying to help the IMF design policies that will thwart the kind of corruption that this case illustrates.

    Chairman BACHUS. I would encourage you all to work together.

    One other question. Dr. Lipton, following up on what I have asked Mr. Kneir, some have maintained that much of the problem in Russia can be attributed to the so-called crony capitalism. In fact, I have even read claims, and this is in the mainstream press, that as much as half the Russian economy is controlled by a handful of oligarchs.

    There was an article in the The Washington Post in the last two or three days which says that one of these oligarchs, one of the most influential, has tremendous influence over President Yeltsin and is assisting him in staying in office.

    Does the IMF and the U.S. Treasury consider corruption as a primary major obstacle to economic success in Russia?

    Dr. LIPTON. Yes, absolutely. We consider this to be a very dangerous presence in Russia. And on your previous question, the instances of corruption are all too prevalent. We hope that with the kind of reforms that the IMF has been proposing, that a rule of law can be created and a level playing field in which other people can get into business and there can be more honest business and less access and influence for a small group of people who have become too powerful.
 Page 62       PREV PAGE       TOP OF DOC

    Chairman BACHUS. And to follow up on that, you stated in your testimony that the Russian economy is under-monetized.

    Dr. LIPTON. Yes.

    Chairman BACHUS. These same articles claim that the oligarchs and robber barons have actually transferred as much as $100 billion out of Russia and ''They are in the process of buying up large chunks of the French Riviera''—that is a quote from one of the articles—''and other resort areas.''

    Has the IMF or the Treasury Department estimated or made any attempt to estimate how much these oligarchs have transferred out of Russia? Is $100 billion roughly accurate?

    Dr. LIPTON. I think it is very hard to know about a particular group of individuals but there are estimates that one can make from Russia's balance of payments, where one looks at export earnings and imports and the reserves of the Central Bank and you see a gap. The gap shows that a lot of the money earned by Russia is not coming back to Russia.

    Whether it is the oligarchs or ordinary Russians, and I think when one hears stories of many, many Russians running around the Riviera spending a lot of money, the tragedy of Russia right now is that the monies, the resources Russia has, which, as have been pointed out here, are quite scarce and precious, are not staying in Russia, being invested in Russia, because the economic climate is not welcoming and people feel as though they are better off putting their money outside.
 Page 63       PREV PAGE       TOP OF DOC

    Chairman BACHUS. Well, do not hold me in suspense, Dr. Lipton.

    Dr. LIPTON. I think that the numbers from the balance of payments have run as high as $15 billion in individual years, which would not be, over that time period, terribly inconsistent with the number you cited. I can get you an estimate from the balance of payments for the whole period.

    Chairman BACHUS. If you could do that, tell us what that gap is. And I know that, as you say, there could be associated reasons, but we would certainly appreciate having that.

    Mr. Sanders has some follow-up questions.

    Mr. SANDERS. Just a couple of points and questions.

    Mr. Chairman, as you will recall, a number of months ago you and I submitted a number of questions to the Treasury Department. Not terribly surprising, after months and months, guess when we got the answers? Yesterday at 6 p.m. So we thank you for giving us time to analyze those responses.

    One of the responses was quite interesting, Mr. Chairman. You will remember that a number of Members of Congress from both parties for many, many years have been passing resolutions saying to our representative to the IMF, ''We urge you to use your voice and votes to protect workers' rights, to protect the environment, to deal with the issue of moral hazard, not to bail out speculators.''
 Page 64       PREV PAGE       TOP OF DOC

    And you know what we found in terms of the answer that we got yesterday at 6 p.m. from the Treasury Department? And I quote: ''The U.S. executive director has not formally requested any votes since the beginning of 1994 or, within memory, preceding years.'' That means that all of those amendments passed by all of those folks, thinking that they were going to do the right thing and have our representative of the IMF represent the interests of the American people were completely ignored.

    Dr. Lipton, would you like to comment on that?

    Dr. LIPTON. In the way in which the IMF operates, the executive director, as you know, seldom votes because there are not many votes taken, but very often has the opportunity to use voice——

    Mr. SANDERS. Why are there not votes taken? We have veto power over the IMF. The Congress has told our representative to do certain things, use her voice, his voice and vote. Why haven't they done that?

    Dr. LIPTON. The executive director has used voice, as I say, on many occasions and vote on those occasions where there were votes.

    Mr. SANDERS. Let me quote again. ''U.S. executive director has not formally requested any votes since the beginning of 1994 or, within memory, preceding years.'' Don't you see that is in violation of the intent of Congress, which said for many, many years we urge you to use your voice and vote?
 Page 65       PREV PAGE       TOP OF DOC

    We have veto power over the IMF, I am told, or close to it. Let us not argue that one. Clearly a lot of power.

    Dr. LIPTON. We have a lot of power and influence.

    Mr. SANDERS. And all that we would have to say is somebody goes up there, ''I urge a vote on the following issue, that no money, for example, go to a country that does not respect internationally recognized workers' rights.'' We could do that, couldn't we?

    Dr. LIPTON. We could ask for votes. It has been the practice of the executive director to use voice in order to convey when necessary the mandates from the legislation. And on those occasions where there were votes, not votes that we called but where there were votes, there are occasions where we have cast the vote.

    Mr. SANDERS. Let me ask another question of Dr. Lipton. This picks up on a point that Mr. Bachus just raised. According to a professor at the Russian State University of Humanities in Moscow, Professor Dmitri Vaziliev, some $4.8 billion that constituted the first tranche of the IMF-initiated $22 billion loan package has ''already ended up in the hands of Russian and Western financial dealers who spearheaded the run on the currency while, at the same time, pulling out of the GKO''—that is the treasury bill—''market.''

    Do you consider that an appropriate use of taxpayers' dollars? And furthermore, can you give us a figure as to what proportion of all IMF funds for Russia went to repay foreign investors?
 Page 66       PREV PAGE       TOP OF DOC

    Here is my question. You have people who are hungry in Russia, workers who are unpaid, old people who are not getting their pensions, and yet you have foreign speculators who are getting 100 percent back, were getting 100 percent back in interest on their loans to the Russian government. Sounds a little strange to me. Can you comment on that?

    Dr. LIPTON. Let me try to explain. The strategy of this program was to maintain the exchange rate, the exchange rate of the ruble, and to prevent exactly the kind of devaluation that has now happened. I see a report this morning that inflation in the first week of September was 36 percent.

    The event that has happened is one that is going to penalize ordinary Russians very severely in terms of the wiping out of the real value of their savings and leave the government in a position where it will not be able to make social safety net payments and wage payments.

    The attempt, the strategy was to try to back a reform program and a Central Bank in preventing exactly this outcome. Had those monies flowed out and the exchange rate defense been successful, no one would have gained and no one would have lost because the value of the dollar and of the ruble—-

    Mr. SANDERS. I know the time is limited and I apologize for that, but can you give me a guess? If you are a miner in Russia and you have not been paid for six months and you are reading that American banks or Japanese banks are getting 100 percent rate of return on their loans, you might feel that something is not quite right.
 Page 67       PREV PAGE       TOP OF DOC

    Do you have a guess as to how many billions of dollars have gone into the hands of foreign speculators and investors who have received huge rates of return on their investments?

    Dr. LIPTON. May I make two points? First, when the money was borrowed in the first place, it was used to pay those miners and to maintain social safety payments. And it is now the repayment of those loans that has become so difficult that Russia has interrupted its debt service on bonds and many other obligations.

    In fact, most investors have lost huge amounts of money in Russia in the last several weeks. There are six——

    Mr. SANDERS. In the last several weeks.

    Dr. LIPTON. That is right.

    Mr. SANDERS. What about before that? How many billions of dollars were made at huge interest rates? And wasn't the function of further IMF loans to help make sure that these guys did not lose any money?

    Dr. LIPTON. No. The idea of the IMF loans was to try to support a kind of reform process that would make those high interest rates unnecessary, so the Russian government could borrow without paying high interest rates. But during the period of the Asian crisis, the Russian government resorted to the high interest rate borrowing in order to be able to have the money to continue to pay the wages, the social safety net payments and bridge the period where they were unable to collect taxes. The strategy was to get through to a point where reforms could take hold and interest rates could come down.
 Page 68       PREV PAGE       TOP OF DOC

    You are right that many people who invested in Russia in these bonds made a high return during the period until the interruption. However, many, many people have lost large amounts of money and major financial institutions have lost hundreds of millions of dollars as a result of the collapse of this strategy.

    And I think that in that sense we had a shared interest. We, our financial community, the Russian people had a shared interest in seeing reforms succeed, and this setback is a setback not just for Russia but for the United States.

    Mr. SANDERS. Is there time for another question?

    Chairman BACHUS. Go ahead.

    Mr. SANDERS. Thank you for the extension of time, Mr. Chairman.

    This is for Mr. Kneir. The data provided by the FBI to the Center for Strategic and International Studies in Washington and confirmed by Russian law enforcement sources for a 1997 report showed that half of the country, half of Russia's 256 largest banks were linked to organized crime through extortion schemes and money laundering.

    Do you know about this report? Is it accurate? Was this information supplied to the Department of Treasury as they debated whether to throw billions of taxpayer dollars into Russia? Are you familiar with that report, sir?

 Page 69       PREV PAGE       TOP OF DOC
    Mr. KNEIR. I am familiar with the report. I think all law enforcement agencies and the IMF had access to that report. I think a lot of those figures are coming from MVD themselves from interviews that were done.

    Mr. SANDERS. Is that an accurate assessment of the condition of banks in Russia?

    Mr. KNEIR. At that point in time it may have been accurate. And again I guess the debate would be the amount of involvement of organized crime in a particular bank. The case that I cited, the bank was only set up for the specific means to fraudulently take people's deposits. That would probably be on the far end of the spectrum.

    Mr. SANDERS. That is the extreme case.

    Mr. KNEIR. Exactly.

    Mr. SANDERS. But do you think it is actually possible that half of the largest banks in Russia are involved in extortion schemes and money laundering? Is that far fetched or is that a reasonable hypothesis?

    Mr. KNEIR. Again I think you find worldwide a number of banks can be involved in unwitting money laundering just by sending wire transfers out. I mean the extent of their involvement, insider involvement, I would have to speculate. I do not know.

    Mr. SANDERS. Thank you very much.
 Page 70       PREV PAGE       TOP OF DOC

    Thank you, Mr. Chairman.

    Chairman BACHUS. Thank you.

    Mr. Manzullo.

    Mr. MANZULLO. I have one question for Dr. Lipton. It looks as though you are in the hot-seat today but you have done a good job.

    Is there any attempt by Mr. Camdessus to revive his statement made six or seven months ago that he wants to amend the by-laws of the IMF to impose the Multilateral Agreement on Investments to the members?

    Dr. LIPTON. There is a discussion that has been on-going for a couple of years about whether the jurisdiction that the IMF has presently over trade should be extended to include capital account transactions. That discussion led to a preliminary declaration about a year ago on a framework for thinking about this subject, but it has not moved significantly forward since last September.

    I have not spoken to Mr. Camdessus about this but I believe that in light of what is going on in the world, it makes sense for us to pause and make sure we understand this crisis and the role of capital flows in this crisis before taking up that subject.

    Mr. MANZULLO. I appreciate that but I wonder if our government is going to take more than a pause on this. I have supported NAFTA and GATT and most of the international treaties, but I have big problems with a Multilateral Agreement on Investments, because it could determine the recording fees for local county recorders and be a direct assault upon the sovereignty of the United States.
 Page 71       PREV PAGE       TOP OF DOC

    I would trust, and perhaps this could be made part of any type of vote this body takes, that the MAI would be dead on arrival.

    Dr. LIPTON. Just to clarify, there are two very closely related subjects: the IMF's jurisdiction over capital account transactions and the MAI. I think Camdessus was speaking about the one. The other is a process that was under consideration but has stopped and I do not think there are plans right now for beginning a set of negotiations on the MAI.

    Mr. MANZULLO. Thank you.

    Chairman BACHUS. The gentlewoman from California, Miss Lee.

    Ms. LEE. Thank you, Mr. Chairman. I am glad that you asked the question with regard to the closer coordination between law enforcement, the IMF and the Treasury. And Dr. Lipton's response pleased me.

    However, what I would like to ask you, Dr. Lipton, is given the fact that we have already spent billions of dollars in Russia without these types of controls, how do we explain to the American people that that was then and this is now and that we are going to move forward differently? And what type of compensation or what type of explanation do we give as a result of this?

    And then second, Mr. Hinchey mentioned, and I do agree with him that most of the problems that we are seeing in Russia is the fact that the IMF has not helped in terms of a transition period in instituting the type of requirements and reforms that are necessary for a country to transition from communism to capitalism. And I would like to know if the IMF has actually been successful in any communist country making this transition in the past.
 Page 72       PREV PAGE       TOP OF DOC

    Dr. LIPTON. Let me start with your second question. I think that the IMF's involvement in Poland and in Hungary shows that the concept of transforming a communist economy to a capitalist economy, that process can work. It was an unknown process at the time it began. There was a lot of experimentation and learning, mistakes made and corrected.

    We had no illusions when the IMF began its work in Russia that it would be anywhere near as easy in Russia as in Poland and Hungary. Those were countries that had been under the communist yoke rather than been the designers of communism. There was a memory of a market economy among older people. There were tighter links with Europe, and so on.

    I think it is difficult to explain to the American people this failure and its costs. I think the best we can do is to explain that it is something, it is a process, the process of creating a market economy and a democratic Russia, in which the United States has a huge stake. We have a huge stake in the success of this.

    I think it was a proper strategy to attempt to support reform. As I said earlier and as I believe, many important building blocks were put in place but enough were missing that the construct has not stood and we have had this terrible setback from which we will have to recoup, work with Russia, encourage them to try once again to build a market economy.

    Ms. LEE. But let me just ask you, I keep going back to the quasi or de facto support of the criminal activities and the corruption if, in fact, we did not clearly state that IMF funding would not be allowed and we will immediately halt that funding if we find that that occurs. How do you explain that, after billions and billions of dollars being spent?
 Page 73       PREV PAGE       TOP OF DOC

    Dr. LIPTON. I think the unfortunate reality is that in a market economy, and Russia has already the main constructs of a market economy, it is very hard to monitor exactly who is engaged in what transaction. And as this fixed exchange rate fell apart, many people were the ones selling rubles and buying dollars.

    And the main purpose of the program was to promote ruble stability, which we think was a genuine and important aim that would benefit the Russian people. And, in essence, what was a Russian failure to sustain reform and to have a strong enough and cohesive enough political situation to sustain reform led to the problem that there was this attack on the ruble, which proved successful.

    Chairman BACHUS. Thank you. Our last five minutes of questioning will be Mr. Hinchey and then the first panel will be dismissed. We will go directly to the second panel at that time. There will not be any statements by the Members unless a vote is called in the interim and if that is the case, at the end of this five minutes we will recess to vote and then the second panel will be seated and will give their oral testimony.

    Mr. Hinchey.

    Mr. HINCHEY. Mr. Chairman, thank you very much. I want to again express my appreciation for being here with you and listening to this testimony and to these questions and answers.

    This is a very important process and the Members of this subcommittee, this larger Banking Committee, are very familiar with the complexities of financial bail-outs. Many of the Members on this subcommittee went through, many from beginning to end, the domestic savings and loan crisis. The cost of the corrective measures that had to be taken in the context of that problem ranged somewhere in the neighborhood of $150 billion. And that enormous expenditure was in the context of a situation over which we had substantial control. It was domestic. The institutions and executives had to abide by our laws. And it was something that we could shape fairly well.
 Page 74       PREV PAGE       TOP OF DOC

    Nevertheless, we found a great deal of corruption throughout that process, before, during and to some extent even after the bail-out was completed. A lot of criminal figures were sent to prison. A lot of money changed hands. A lot of people got away with a lot of very bad things.

    Nevertheless, it was a process that had to be engaged in, because the fundamental health of the economy was at stake and overall I think most people looking back at it would say that it was done in a responsible, although imperfect, way.

    I was just thinking about that and impressed with the complexities of the current global situation. Trying to deal with the Russian economy is far more complex than trying to deal with our economy. Their problems are much more severe than was the savings and loan crisis here in the United States, because their problems run throughout the entire economy.

    But our problem, Dr. Lipton, yours and mine and others' and our Chairman's, is to rationalize the situation in a way that is sellable to the Members of the Congress and the American people.

    So you are probably in an unhappy situation. You should not be the guy defending this. You are an official of the United States government, our Treasury Department, not the IMF or Russia. But you understand and appreciate the interrelationships of our economy and theirs and the need to accomplish this objective.

    I think we need to know a couple of things, probably in some detail. Where has the money gone? Who has it? Why do they have it? And how did that all happen? How much was involved in that?
 Page 75       PREV PAGE       TOP OF DOC

    To what extent, Mr. Kneir, is the endemic corruption in Russia manageable, correctable? Can we see an end to it? The same people who are corrupting the system and taking advantage of it in the ancien regime, the previous regime, are in many cases those who are corrupting and taking advantage of the present set of circumstances.

    When is that going to stop? When are these people going to be brought to justice? Is there any likelihood of that happening? Is there any likelihood of establishing a criminal justice system in Russia that will be able to deal effectively with the rampant organized crime that is afflicting that society?

    And then finally, to what extent can we feel some sense of security that an infusion of an additional amount of money will begin to have some impact and that we will begin to see the light at the end of this very dark and dangerous tunnel?

    Mr. KNEIR. To answer your question, you have to start with small steps and we are trying to take that with our relationships with the law enforcement. I guess we could turn back the calendar a few decades back to Italy and the situation that we found when we first really started looking at some of the crime that affected both Italy and the United States. The steps that were taken then, I think we have come a great way with dealing with that situation and have a great working relationship today.

    We have to continue with our training. We have to continue supporting their internal affairs, the training for that. Is there light at the end of the tunnel? We hope so. We will have to continue doing many of the same things that we have done with many other law enforcement services to get us to the degree of cooperation that we share with them today.
 Page 76       PREV PAGE       TOP OF DOC

    Mr. HINCHEY. Mr. Chairman, I do not know if Dr. Lipton cares to respond.

    Dr. LIPTON. Just to say that I think your comment makes clear that Russia has an extremely difficult challenge ahead, to build a political consensus to have the rule of law, to have a market economy so that they can then, working on projects like their collaboration with us on enforcement, have the ability to bring corruption under control and allow everyday, ordinary Russians to have the chance to be market participants without the plague of corruption.

    Chairman BACHUS. Thank you.

    Dr. Lipton, often in congressional hearings we slay the messenger. I know there is not a lot of good news out there and you were designated by Treasury to bring that news to us.

    Dr. LIPTON. My pleasure.

    Chairman BACHUS. I think that is a compliment to you and your abilities. Knowing your background and your work, I know you are highly competent.

    I want to say to both you and Mr. Kneir from the FBI that I think you have served your agencies well in this hearing. I think your testimony has been very professional and that your responses to the questions have been open and honest and not what we sometimes get here, which is a sort of synthesized mumbo-jumbo. You really answered the questions, and that is refreshing. I appreciate that and appreciate your attendance here today.
 Page 77       PREV PAGE       TOP OF DOC

    Mr. SANDERS. Thank you very much.

    Chairman BACHUS. At this time we will call the second panel. The second panel consists of Professor Peter Reddaway of George Washington University; Dr. Ariel Cohen of the Heritage Foundation; Dr. Mark Weisbrot, who is with the Preamble Center for Public Policy.

    In addition to those three gentlemen, it is my pleasure as an Alabamian to welcome to the subcommittee hearing a fellow Alabamian from Demopolis, Alabama to provide a Wall Street perspective, and that is Mr. Jim Rogers, international investor and author of the book ''Investment Banker.'' I have often seen him on CNBC, been impressed with him, proud that he is a fellow Alabamian.

    As they make their way here I will say to Mr. Rogers that the counsel for the subcommittee, Mr. Win Yerby, who helped put together this hearing and really has been following this ably for the subcommittee for several years, is a former associate editor of the Chicago Law Review and hails from Marion, Alabama and he tells me that you can get from Marion to Demopolis in about 15 minutes by going about halfway and turning left. He tells me that is a union town.

    I am proud as an Alabamian to welcome you and our counsel is also an Alabama boy from not far down the road from where you started.

    With that, we will start testimony with Professor Reddaway. We appreciate your attendance here today.
 Page 78       PREV PAGE       TOP OF DOC

STATEMENT OF PETER REDDAWAY, INSTITUTE FOR EUROPEAN, RUSSIAN AND EURASIAN STUDIES, GEORGE WASHINGTON UNIVERSITY

    Mr. REDDAWAY. Thank you very much, Mr. Chairman. I would like to preface my remarks with a request and a comment. First I would like to ask that my written statement be inserted in the record and to note that a slightly different version of it is due to appear shortly in the Journal of the U.S.-Russia Business Council, known as Russia Business Watch.

    Chairman BACHUS. Without objection. In fact, the written statements of all the panelists will be submitted if I do not hear objection, and I do not. And we look forward to reading about that later.

    Mr. REDDAWAY. Second, I would like to emphasize that I am a strong believer in free markets and capitalism, because I see them as being essential to a healthy democracy. There are, of course, certain built-in tensions between capitalism and democracy, tensions that a healthy democracy addresses by passing laws against, for example, monopolies.

    The problem in Russia, as I see it, is that the democracy there is not healthy and has failed in practice to impose such restrictions on Russia's young capitalism, despite the strong efforts of many democratically minded Russians. The result is the emergence of a raw and often vicious capitalism, what Russians frequently call wild capitalism.

    Because most Russians dislike this perverted sort of capitalism, it is not clear how Russia's economic system will develop in the future. Russia may reject some aspects of capitalism, at least for a time.
 Page 79       PREV PAGE       TOP OF DOC

    Let me now present a few of the main points in my written testimony. In August 1991, after defeating the hard-line communist coup, President Yeltsin and his government had strong support from a majority of the Russian people. They were free to chart a new economic course and they decided, with the encouragement from G7 governments, to adopt the standard IMF program for macroeconomic stabilization known as shock therapy.

    They did this even though the program had hardly been debated in Russia, even though it was opposed by a number of experts in Russia and in the West, including myself, and even though it quickly ran into stiff opposition from much of the Russian political spectrum.

    The fatal flaw in the IMF's program, as I see it, is that the political, legal and cultural conditions in Russia were not suitable or appropriate for such a program. They were more or less OK for Poland—the conditions in Poland were more or less OK, but for Russians the program was, at the very least, premature.

    Communism in Russia was a homegrown phenomenon and the Russians had to suffer under it for 74 years. It was a very poor training for capitalism.

    The IMF's philosophy of shock therapy led the Russians seriously astray, because it is a philosophy that is based on the theory of so-called rational choice, which holds that historical and cultural factors are not important. The IMF philosophy holds that when a nation is presented with the obviously rational principles of capitalism, they will almost instantly, in one or two years, abandon their long held patterns of behavior and promptly embrace the so-called rational choice.
 Page 80       PREV PAGE       TOP OF DOC

    Worse still, the IMF and such supporters as Jeffrey Sachs and Anders Aslund, who advised the Russian government in 1992 to 1944, and also the G7 governments, believed that shock therapy had to be pushed through against all opposition, even if this meant uncritically supporting an increasingly authoritarian and undemocratic President Yeltsin.

    Over the next few years, the main political result was that the Yeltsin regime lost the backing of most Russians, who became alienated from him and even from the state. Trying to compensate for this and stay in power at all costs, Yeltsin's administration proceeded first to privatize most of the assets of the Soviet economy in ways that, in practice if not in theory, paid little attention to social justice.

    In particular, it let leading bankers and businessmen, a group known as the financial oligarchs—several people have mentioned them already—acquire major state assets at little or no cost to themselves.

    Second, the Yeltsin regime relied ever more heavily on the IMF, the World Bank and other Western institutions for loans and grants. Thanks to this flow of cash, Yeltsin-favored bankers and tycoons, in a style very reminiscent of Suharto's Indonesia, were allowed to make large sums of money with little effort in a variety of ways: by using government money that they held in their own banks for speculation, by speculating in high interest government bonds, and by exporting large quantities of oil, gas and metals and, in practice, paying minimal taxes on their very high profits.

    Also, each year the amount of money lent to the Kremlin by the International Monetary Fund—I will leave aside the World Bank and other sources—was larger than the year before. And each year bad things followed the granting of the loans—in politics as well as in economics.
 Page 81       PREV PAGE       TOP OF DOC

    For example, three months after the IMF gave its second loan of $1.5 billion in 1993, Yeltsin sent his tanks to abolish the democratically elected parliament that had brought him to power but was now opposing him. Hundreds of people were killed in the streets.

    Then, in 1994, after getting another $1.5 billion from the IMF, Yeltsin sent his tanks into Chechnya, a republic within Russia, launching a war that cost about 100,000 lives, most of them ethnically Russian civilians. Much of 1995's IMF loan of $6.8 billion went to finance the continuing bloodbath in Chechnya, the total cost of which exceeded the value of the loan.

    In April 1996, a new, hastily assembled loan of $10 billion helped to fund Yeltsin's reelection campaign, a campaign on which Yeltsin and his associate Anatoly Chubais spent some 200 times more than the maximum sum allowed by law.

    Finally, having repeated in 1997 on many occasions that they would not seek any more IMF loans, Yeltsin and Chubais asked for and were, thanks in part to strong pressure from the U.S. administration, awarded this July not a small sum to compensate for the low world price of oil and fend off ripples from the Asian financial crisis, but an extra $17.1 billion, including $11.6 billion in new money from the IMF. The main purpose of this loan, as has been said, was to prevent the ruble from being devalued.

    Well informed observers who had warned that devaluation was inevitable, even if the loan were made, observers who included Dr. Illarionov, who is going to testify on the next panel, also Dmitri Glanski and myself, these observers were simply ignored. Devaluation and also default on debts followed three weeks after $4.8 billion was sent to Moscow and, of course, wasted. The ruble sank from about six to the dollar to about 20 to the dollar.
 Page 82       PREV PAGE       TOP OF DOC

    As Mr. Bachus noted, Mr. Chubais says now that he and the Russian government gave the IMF the misleading impression that the loan would prevent a devaluation. He also claims that—this is my own translation from the original Russian text—''Today the international financial institutions understand that despite everything we have done to them, and we cheated them out of $20 billion, we had no other way out.''

    I think this sentence was not carefully read by Dr. Lipton. I think the sentence makes his interpretation of this interview untenable. Of course, it may be that Mr. Chubais is wrong in believing that the international institutions have forgiven him for all the deceptions involved. You obviously need to talk to the IMF about that.

    How the IMF, the World Bank, the G7 governments and other institutions could not, from 1992 onward, see through the rhetoric of Yeltsin, Chubais and Chernomyrdin, who claimed that they were ''pressing forward on the path of democratic market reforms and following the IMF's prescriptions,'' is hard to understand.

    Many observers, including myself, were documenting how the Kremlin was feeding crony capitalism, paying scant attention to democracy and the rule of law, even though many good laws were adopted on paper. And thus, the Kremlin was scaring off would-be investors in the economy, especially small businessmen and foreigners. Most of the processes I just described were actually furthered by IMF cash and not hindered.

    The G7 governments and the financial institutions have also failed to understand that, as I indicated earlier, the nature of Russia's steadily building crisis of the last six years has been at least as much political as economic. The Yeltsin administration has steadily lost its legitimacy in every sense except the most formal one. Without a change of political regime, then, no economic revival is possible.
 Page 83       PREV PAGE       TOP OF DOC

    In the West meanwhile, we may now at least hope that the G7 and the international financial institutions will, given the clear failure of their Russia policies, soon launch the full scale reassessment of those policies that some observers, myself included, have been advocating for the last five years.

    What can we expect in Russia now? Today Russia is in a profound systemic crisis which has closely interlinked political and economic components. One of the greatest dangers the crisis poses for the West is that the Russian people may soon become so alienated from the West and its recipes for democracy and capitalism that have worked badly, that we will no longer be able to turn their alienation around.

    In these circumstances, the West needs today, above all, not to lecture or pressure the Russians to do what we want them to do, and as Dr. Lipton unfortunately seemed to be doing in his testimony. The Russians have had more than enough of this. They need to take full responsibility for their own policies. At the same time, the West must stay engaged and attentive and, when requested by a responsible Russian government or by civic groups, do as much as it can to help, for humanitarian, nuclear safety and other purposes, along the lines proposed by Mr. Curt Weldon in his eloquent testimony, with which I heartily agreed.

    As for Russia itself, on the political side, the most acute danger is that society as a whole may very soon lose faith in the power of the Federal Government to control events at all. If that were to happen, the short prognosis would probably not be a military coup or a mass uprising. Neither of these developments, though conceivable in the future, appears to be in the cards now. Rather, the Russian regions will be forced to conduct their affairs with little or no reference to Moscow. They will refuse to send any taxes to the government, as Khakassia Republic and the Kaliningrad region have done already. They will start accumulating their own gold and foreign currency reserves, as the Sakha Republic and Kemerovo region have just done, and so on.
 Page 84       PREV PAGE       TOP OF DOC

    Chairman BACHUS. Thank you, Professor Reddaway. We appreciate your remarks.

    Dr. Cohen.

STATEMENT OF DR. ARIEL COHEN, SENIOR POLICY ANALYST, THE HERITAGE FOUNDATION

    Dr. COHEN. Thank you, Mr. Chairman. Thank you, Members of Congress.

    The first warning that I would like to sound is that the disaster of Russia and the East Asian crises should not discredit the principles of free market capitalism any more than the victory of the Nazi Party in the German elections in 1933 should discredit the principles of participatory democracy. Russia failed, not because of too much capitalism, but because of government incompetence, corruption, lack of legitimacy, lack of economic skills.

    It also failed because of lack of leadership by the government of Russia, by the U.S. administration and the international financial organizations, such as the IMF.

    The writing on the wall was clear. More than a year ago, in June of 1997 I published a short Heritage Foundation paper called ''The Russian Borrowing Spree,'' warning that the borrowing by the Russian government at interest rates in excess of 40 or 50 percent per annum and the failure to collect taxes create a bubble that will lead Western investors and Russian people who bought the Russian government debt paper astray, and that is exactly what happened.
 Page 85       PREV PAGE       TOP OF DOC

    The IMF approached the crisis without any adequate structure of risk assessment. The first duty that any responsible banker takes upon himself or herself—examine what the situation is and assess it.

    It was because of the government of Russia's pressure and support of the Clinton Administration that the IMF executive board was lobbied to allow approval of the new funds and to attempt to bail Russia out. These funds came in addition to the $11 billion package approved by the IMF in 1996.

    What is appalling is the reaction of the IMF top brass to what happened. Just if you will allow me two quotes. On July 20, in a press release, Professor Stanley Fischer, the first deputy managing director of the Fund, said, ''The enhanced policy package represents a strong and appropriate response to overcome Russia's current difficulties.''

    Second, after the collapse on August 17, Michel Camdessus, the managing director, said, ''Implementation of Russia's economic program has been satisfactory. Despite this, confidence in financial markets has not been reestablished and, as a result, Russia has continued to lose reserves and asset prices have fallen sharply.''

    In other words, the operation was a success but the patient died.

    The causes for pessimism about Russia run deep. The country's economic woes did not start yesterday. They are the result of 74 years of communist mismanagement and almost eight years of half-hearted reforms under the post-communist regime. I will briefly enumerate the problems and you can refer to the written testimony to fully examine those.
 Page 86       PREV PAGE       TOP OF DOC

    One is a fiscal and budgetary problem. The country has been running up large budget deficits of 7.5 percent of the GDP. The tax collection system was arbitrary, punitive and complex. And, to make it worse, it is corrupt and mismanaged.

    Second, the structural problem. Russia has yet to experience meaningful economic growth in the post-communist era. Its industrial base is obsolete. You often find machines from the 1920's, 1930's and 1940's in the Russian plants and machines from the 1970's are considered modern. When is the last time that you bought a Russian car or a Russian suit? The industrial base produced goods that were not competitive in the domestic market or global market. Therefore this industry, with the exception of oil and gas, could not generate revenue. Professor Yassin, the former Russian Minister of the Economy, told me in 1994, ''Russian industry is value-subtracting.''

    With such industry, how can you generate tax revenue? How can you create a tax base for the government?

    Third, the lack of financing and venture capital needed for economic growth.

    The fourth problem, lack of governance and management expertise necessary to run a modern market economy.

    Fifth, lack of functioning legal system and a mechanism for enforceable dispute resolution. And if you do not have that, no investors, foreign or domestic, will come to that market. The foreign investors will stay away. The domestic investors will invest their money elsewhere—in the French Riviera real estate that we heard about here or in businesses or securities abroad.
 Page 87       PREV PAGE       TOP OF DOC

    One important issue that nobody mentioned so far, Mr. Chairman, is the nexus, the linkage between Russia's foreign policy and our national security on the one hand and our continuous assistance and financial support of Russia on the other hand. We found out today that President Yeltsin has nominated the former head of the Russian spy service, Mr. Primakov, who built his career in the Soviet era as a propagandist and proponent of the most rigid anti-American policy, to be prime minister.

    Mr. Primakov is a supporter of Saddam Hussein in the U.N. Security Council. He is a proponent of Russian cooperation with the Islamic Republic of Iran. Mr. Primakov is in favor of a Eurasian geopolitical bloc that will oppose the United States.

    How do we continue to provide economic assistance when Russia is spending billions and billions of dollars on nuclear modernization, on building nuclear powered battle cruisers or aircraft carriers, on a new fleet of intercontinental ballistic missiles called TOPOL-M2?

    To conclude, Mr. Chairman, the Russian financial crisis demonstrates the failure of IMF toward Russia happened on three levels. First, inadequate risk assessment was clearly conducted concerning the loan beneficiary. The IMF has overestimated the growth rates of Russian GDP every year since 1994.

    Second, the IMF committed to the lending package, betting that the Russian government would put policies in place that it either could not or would not implement. This is equivalent to misreading the business viability of a loan applicant by a banker.
 Page 88       PREV PAGE       TOP OF DOC

    And finally, the IMF made deals with individuals, such as former Prime Minister Kiriyenko and debt negotiator Anatoly Chubais, who proceeded to disappear from the political scene without the IMF being able to secure their stay. This is as if a large company lost their top management immediately after a large bank loan has been made.

    Thus, the IMF failed in its due diligence procedures. It violated its fiduciary duty to the shareholders, member governments and to taxpayers who finance these governments with funds that support IMF lending policies.

    The only achievements of the Yeltsin administration, stable currency and low inflation rate, have gone down the drain. The political price for the future of democracy and open markets in Russia will be tremendous as millions of workers and pensioners have not been paid for months.

    Prior to August 17's devaluation, Russia has asked if the international community was prepared to provide some additional financial support beyond $22.5 billion promised on July 13. The G7 so far has refused to provide additional assistance, but now there is increasing talk of new bail-outs.

    There is certainly enough blame available in the Russian fiasco to go around. However, the reasoning, or lack thereof, behind certain key decisions at critical periods in the developments of the current crisis need serious reconsideration.

    When asked at the July 13 press conference if the relatively low liquidity of the IMF would prevent the organization from engaging in new lending, IMF Treasurer David Williams responded, ''As Mr. Fischer said, we never say no.'' This policy lies precisely at the heart of the problem.
 Page 89       PREV PAGE       TOP OF DOC

    It is up to the Russian leadership and the Russian people to resolve the multiple crises it finds itself in. Only facing reality and administering the necessary, albeit bitter, medicine, not the IMF's anesthetics, holds out any hope for Russia's economic revival.

    As Dick Armey, the Majority Whip of the House noted in his June 2 ''Dear Colleague'' letter, by not approving the IMF supplemental, the U.S. Congress may help break the bail-out psychology.

    In addition, the West can and should help with advice and support. This includes academic and professional training, support of institutional development of markets and civil society, pro-market and pro-democracy policy work by business associations, think-tanks and universities, exchanges and conference activities.

    Russia is playing a tremendously important role as the main test for transition from communism to democracy and market economy. If it fails, many other societies may turn away from the rule of law, participatory government and competitive private sector-based economy. If it becomes either unstable or authoritarian, it may emerge as a destabilizing force in Eurasia and threaten its neighbors in the former Soviet Union and East and Central Europe and create tremendous difficulties for its own people.

    The U.S. should continue to be engaged in trying to turn Russia around but we should do it while relying on incisive economic and political analysis and creative solutions, not the failing policy of throwing money at Russia's economic black hole.

 Page 90       PREV PAGE       TOP OF DOC
    Chairman BACHUS. Thank you, Dr. Cohen.

    We are going to recess for about ten minutes. We are under five minutes and we have to recess, according to the House rules. We will reconvene in ten minutes.

    [Recess.]

    Chairman BACHUS. I call together the subcommittee hearing and Dr. Weisbrot, if you will proceed. We appreciate your attendance.

STATEMENT OF MARK WEISBROT, RESEARCH DIRECTOR, PREAMBLE CENTER FOR PUBLIC POLICY

    Mr. WEISBROT. Thank you, Mr. Chairman and the subcommittee Members, for inviting me. I have written testimony which is on the table there and I assume will be in the record but I am going to depart from that.

    Chairman BACHUS. And your written statements were distributed to the press actually at 10:00 this morning and several of them will get those remarks and leave.

    Mr. WEISBROT. OK. To avoid repeating what other people have said, I want to take up where the discussion left off a little earlier when Dr. Lipton was here, because I think those were the crucial issues raised.

    I think everybody here realizes that there has been some kind of a terrible disaster in Russia. Even though most of the country, I think outside this room, does not realize how the extent of the disaster, and Congressman Sanders has given some of the facts—the majority of the people living below the poverty line—and that all this happened before the most recent crisis in the devaluation of the ruble and the default on the foreign debt. The decline in life expectancy, which is the worst that has been seen in history, really, outside of wars or natural disasters, and these kinds of things.
 Page 91       PREV PAGE       TOP OF DOC

    So it is a terrible failure and the question is what did the IMF have to do with that? Some people are saying that it was really Russia's fault, because they did not follow the reforms closely enough. The other alternative, put forth by Professor Cohen, who Congressman Sanders quoted—Professor Steven Cohen, that is—there is another Professor Cohen here—is that the plan itself was wrong from the beginning. That is the position that I have and I would like to try to explain that.

    First of all, when Dr. Lipton was questioned he said from 1992 to the present it has been promising; the economy has offered promise; therefore, he tried to attribute the terrible economic disaster to previous—to either the Soviet era or something that happened before the IMF's plan went into effect.

    The IMF's plan went into effect at the beginning of 1992 and was called shock therapy. The idea was and people were told at the time that there would be six months of pain and then things would begin to get better. And here it is six years later and there have been all these shocks and really no therapy at all.

    Now, what went wrong? Well, first of all, the immediate decontrol of prices was the first terrible mistake. And the IMF did not anticipate the inflation that would result from this, even though they knew there was a monopolistic structure to the economy; they knew that there was massive amounts of savings, cash savings that people had in their households. Yet they decontrolled prices overwhelming and immediately in the beginning of 1992 and you immediately had, within the first three months, 520 percent inflation. And this inflation got completely out of control and wiped out millions of people's savings and, of course, their pensions were drastically reduced, as well.
 Page 92       PREV PAGE       TOP OF DOC

    And this, then, caused the IMF to say, ''Well, we cannot use price controls so we have to get rid of this inflation by a drastic contraction.'' And if that is your only alternative, to squeeze the money supply, the availability of credit, to get rid of this kind of inflation, you will, in fact, bring about a depression and that is what they did.

    So they destroyed the economy and then they had an overall idea, which I also think was completely flawed, that you had to dismantle the entire industrial and manufacturing structure, that it is all inefficient; anything that cannot compete in world markets is better off just being left to rust. And I think that is extremely wasteful and destructive, as well.

    And so the idea was to destroy the existing industrial and manufacturing structure and then begin from scratch on the basis of foreign investment. And, of course, that foreign direct investment never materialized. There was net outflow within the first couple of years of capital, a huge net outflow, two to four times the amount that came in through aid or foreign direct investment, and the investment that did come in was speculative. And, of course, we have seen the worst excesses of that most recently right before the collapse of the ruble.

    So this is what I find difficult to understand, is why they cannot admit that they made a mistake, especially in light of the mistakes that they made in Asia just this year, as well. And here the IMF, and you have had hearings on this before so I will not go into it in detail, but the IMF was really responsible for turning what was a liquidity crisis in the financial sphere, something similar to our own S&L crisis, into a major regional depression. It was some of the same policies, the unnecessary austerity, the tightening up on the money supply, the same things that they did in Russia but, of course, in Russia they had a much longer time period and were attempting a much more ambitious project.
 Page 93       PREV PAGE       TOP OF DOC

    So in light of what they did in Asia and then in Russia, you would think they would at least admit to having made these mistakes, but they seem to be able to get away with this idea that everything they did was right and it was really only the Russian government's fault for not taking enough of their bitter medicine.

    And I find this particularly striking in light of the debate that is now taking place within the economics profession on exactly these policies, especially as the turbulence in the global economy increases and markets as far away from Russia and as unconnected with them as Latin America, for instance, are thrown into the same terrible choices: Do we raise interest rates to 38 percent in Mexico, for example, to defend the currency, to avoid the depreciation, inflation and panics, or is there some other way of doing it?

    Now, Joe Stiglitz from the World Bank, for example, chief economist of the World Bank, has suggested that we ought to look at the alternative of having capital controls. And he has, of course, heavily criticized the IMF for their worsening of the Asian financial crisis.

    Jagdish Bhagwhati, another one of the world's most famous international economists of Columbia University and also adviser to the last round of GATT, a major adviser, also favors capital controls as an alternative.

    And here is the IMF pursuing the opposite course, saying they need to amend their articles of agreement so that they can prevent countries—have the official power and authority to prevent countries from implementing capital controls.

 Page 94       PREV PAGE       TOP OF DOC
    Now, I understand there is some debate within the IMF but, as you saw from the questioning of Dr. Lipton, the official position is one, we have never done anything wrong; two, we had nothing to do with the mess—it was all their fault; and three, we need to continue going in the direction we have been going everywhere in the world, regardless of what happens.

    This, to me, is the most dangerous part of the whole mess that we have and I think there is every indication, when people do not recognize any of these mistakes, that they are just going to continue to do the same things. And that is why I think it would be a mistake to put more good money after bad. Thank you.

    Chairman BACHUS. Thank you very much, Dr. Weisbrot.

    Mr. Rogers. We welcome you to the subcommittee.

STATEMENT OF JAMES B. ROGERS JR., ROGERS HOLDINGS

    Mr. ROGERS. Thank you, Mr. Chairman. I am astonished that we are having to have this debate, that Congress is even considering giving any money to the IMF to give to Russia, but since they are, I will just be brief and explain why I think that.

    Basically we have history unfolding before our eyes. The former Soviet Union is the largest contiguous empire that the world has ever seen or ever will see but it was put together over the course of about one thousand years, mainly by the czars. The communists rounded it out.
 Page 95       PREV PAGE       TOP OF DOC

    But in the former Soviet Union there were 126 official ethnic, linguistic, historic, national and religious groups. Now, 125 of those groups did not want to be there. They were there because of guns and soldiers and armies.

    Now, that empire has started unraveling. It has already broken up into 15 states. It is going to be 50 states. It is going to be 100 states. You pick the number. Your number is as good as anybody else's as to how this thing is going to unfold and unravel.

    There certainly is capitalism in the Soviet Union. There will continue to be capitalism. They are not going back to old-style communism, anyway. They may go back to ''communism'' which, as an aside, I think we hope they should go back to communism, because as the thing unravels, then the communists will get the blame for it. Otherwise I am afraid we are going to get the blame for it. We, the West, will get the blame for it as the situation continues to unravel and get worse and worse.

    There is certainly capitalism but the problem has been that it is not capitalism as we understand it. It is outlaw capitalism. It is whoever has got the guns gets it.

    Now, we call these the mafioso. We call these the thugs. We call them various things in the Western press. But again this is really just history unfolding. You go back to any empire that has unraveled throughout history, you have had first many years of disintegration and second, you have had warlords. Whoever has the guns gets it.

    And what these mafioso are are really no more than just the same warlords that you read about in every history book in every empire that has ever dissolved. And they are going to continue to have power in Russia as the empire continues to dissolve.
 Page 96       PREV PAGE       TOP OF DOC

    There is certainly capitalism, but let me tell you a story or two. In Siberia there is a huge aluminum factory. Aluminum is very important in an empire when it dissolves, because you can sell aluminum into the Western markets and get hard currency for it.

    The last several managing directors of that aluminum factory have been murdered. Nobody wants the job anymore. Everybody wants to be the assistant managing director of the aluminum factory.

    Over 400 bank presidents have been murdered in the Soviet Union. This is not capitalism as we know it and anybody who is going to throw money into this rathole has got to be nuts, whether they are a Wall Street banker or the IMF or Congress.

    In Washington they will tell you that the Red Army is going to hold things together. There is no Red Army. Someone mentioned Chechnya before. Chechnya has been going on for six years. The Red Army cannot handle Chechnya after six years. Chechnya is the size of Connecticut. Connecticut has a million-and-a-half people. What more evidence do you need to know that there is no Red Army?

    Dr. Lipton or whoever was here before was saying and the FBI was saying, ''Oh, don't worry; we'll teach some laws and we'll teach them how to police this.'' Who is going to police it? If everybody in the Red Army tried to police it, they could not do it, because the Red Army is trying to steal as much as they can, too. Maybe we could send the entire U.S. Army over there.

 Page 97       PREV PAGE       TOP OF DOC
    The former Soviet Union is four or five times the size of the 48 states. If we sent the whole U.S. military over there, we could not police the IMF money. If we sent the entire population of the United States to the Soviet Union we could not police this. There are 270 million Americans. If every one of us went over there, the thing is so big that there is nobody who can police this thing.

    What I suggest Congress do, if they want to spend $18 billion, is go over here and open the window and start throwing it out the window. At least Americans would get the money instead of the Russians, who are going to get the money and the mafioso and the warlords who are going to get the money if you send it to the Soviet Union.

    So I strongly urge nobody to put any money in the Soviet Union, whether you are an investor or a congressman or a bureaucrat or the IMF, because you are not going to get it back. It is all going to wind up in Corsica or Sicily or on the French Riviera, maybe in Swiss banks, which is where most of it has gone before.

    Now, as to whether the money should be given to the IMF to do this, the IMF has rarely, if ever, been right about anything. If you go back and get out IMF annual reports over the past 50 years you would be astonished at how wrong they have been about just about everything. We have had some testimony here today about how wrong the IMF has been in July or how wrong they were in February or whatever. This has been going on for 50 years. This is not a new thing, that the IMF has been wrong.

    If you read the IMF reports, they have had an astonishingly ''good success rate.'' Well, any successful bank over the past 50 years shows good profits and they are paying dividends to their shareholders. The IMF for 50 years has been coming to us year after year after year saying, ''Give us more money.'' If they were so successful, why aren't they paying out dividends to the U.S. taxpayer and to all of their shareholders?
 Page 98       PREV PAGE       TOP OF DOC

    The reason they are not paying out dividends and the reason they are coming to us every year for more money is because the whole thing is a house of cards. If you get out the financial statements you will see that it is one disaster after another, if you can even figure out what the books say, which very few people can do.

    But essentially the IMF has been wrong about nearly everything they have ever done. They are constantly sucking money out of the taxpayers—all over the world, not just the U.S., by the way, all over the world. And I would also make the point that if Russia is such a wonderful thing and if the IMF can take our money and throw it into Russia and save the situation, I would ask you why aren't the Europeans in the forefront of all of this? The Germans have a lot more money at risk in Russia than we do. Do you know why the Germans aren't at the forefront? Because they want to sit back and let us do it. They want the American taxpayer to do it.

    And you would, too. If you were the Germans, you would say, ''Well, we are in trouble but the Americans are thinking about giving money to the Russians and that will bail us out, so let's just sit back and not say anything. Let's not tell anybody how much trouble we are in.''

    So the Germans, wise as they are, are going to let us take the ball, throw the money into Russia and save them. I suggest to you that if we didn't give the money, then the Germans or somebody else would have to come up with the money and if they did, fine. Maybe it is a good thing and they would bail us out.

 Page 99       PREV PAGE       TOP OF DOC
    But what I suspect would happen is that if we didn't give the money, neither would the Germans. Neither would anybody else, because they know what a rathole this is and what a hopeless situation it is to throw money into Russia. Again I would much rather you bring the $18 billion up to my neighborhood and spread it around. In fact, don't throw it out this window. Throw it out the window up in my neighborhood. Thank you.

    Chairman BACHUS. Thank you.

    First question for the panel, how do you assess Yeltsin's future? Does he have a future? Anybody want to comment on that?

    Mr. ROGERS. Well, I would say to you it really doesn't matter whether Yeltsin has a future or not, because whoever starts running Russia, the situation is going to be just as bad. Moscow has no control over what is going on in Russia anymore.

    Again we had some earlier testimony about the provinces, if we can call them that. The provinces are not paying any attention anymore, so who cares in Russia if Yeltsin has any future or not, because there will be another one and another one and another one, and none of them are going to save the day, not with our money.

    Chairman BACHUS. I think the fact, Professor Reddaway, that you have mentioned that certain provinces are stockpiling gold or setting price controls certainly indicates——

    Mr. REDDAWAY. I would not agree with Mr. Rogers, though, that it makes no difference who rules Russia. I think as long as Mr. Yeltsin stays, the prospects are poor. I think he has completely lost legitimacy and therefore what he says, what his government says, carries no force. They cannot implement anything.
 Page 100       PREV PAGE       TOP OF DOC

    If Mr. Yeltsin resigns and there is a new election, as there ought to be under the constitution, at least Russia will then have a president who has a fresh mandate from the Russian people. He might then be able to appoint a qualified prime minister. He might also arrange for new elections to be held for the parliament, the Duma. Then you would have a parliament also with a new mandate from the people. And, with any luck, the parliament and the president might be able to work together better than they have done in the past. They could be more in tune with each other than they have been over the last few years.

    Of course, Russia's problems will still be very daunting and we cannot have any assurance that things will suddenly go better, but that is the one avenue of hope that I see in what is otherwise a very gloomy picture.

    Mr. COHEN. I would like to add to that that the U.S. administration put all its eggs in one basket by supporting Boris Yeltsin to the exclusion of other leaders, whether nationalists or democrat, whether palatable or disgusting. There are a lot of folks in Russia that we would not invite to dinner, but they are there; they have their electorate and if I was advising the U.S. administration I would say to reach out and talk to people who you don't necessarily agree with.

    But what we did was by backing Boris Yeltsin to the exclusion of everybody else, we became partisan. We became identified with the failures of the Yeltsin regime that the committee heard about—the Chechnya war, the shooting of the parliament, and so forth.

    The question that I am asking myself today is not only what will happen to Boris Yeltsin. I think his days or weeks are pretty much numbered. He is in bad physical shape. But what will happen to what we came to recognize as a semblance of democracy in Russia? Is Russia going to continue with elections and with a media that has a broad range of debate? There are people in this audience who won't agree with me that it is a free media but at least broad range of debate, election to the parliament, several political parties and elected president.
 Page 101       PREV PAGE       TOP OF DOC

    I am not convinced that Russia can survive, unfortunately, in this type of a regime. There may be turbulence, political turbulence and social turbulence in Russia that may sweep away that type of a political arrangement. And God only knows what comes in its stead, whether it is chaos or disintegration or an authoritarian regime that is trying to hold Russia together by force of arms.

    Chairman BACHUS. Thank you.

    Mr. Rogers, your background is in international investing. Do you consider that the so-called moral hazard problem has a real impact on international investors?

    Mr. ROGERS. There is very, very little question that moral hazard, which has gotten to be a very fashionable term, but yes, as you look around the world and if you look over the past ten years, whether it is J.P. Morgan or Deutsche Bank or whoever, it is very easy to go in and make loans at very high interest rates if you know you are going to get bailed out.

    We bailed out the banks in Mexico. We supposedly bailed out Mexico but what we did was we bailed out Fidelity and Goldman Sachs and a few other fancy Wall Street firms. I mean, there is very little question of where that money went, and the rest of it that was left over bailed out the crony bankers in Mexico.

    No, no. Mr. Chairman, if I came to you and said, ''Look, I will take your money and I will invest it at a very high rate of interest, but you don't have to worry, because if things go wrong, you will get bailed out by the U.S. Government,'' you would give me every cent you had if I could give you that kind of guarantee, and that is what happens.
 Page 102       PREV PAGE       TOP OF DOC

    Right now there are thousands of young MBAs on airplanes flying around the world figuring out places they can put money, knowing that they are going to get bailed out by the IMF. But if it were their money and they knew they might not be able to get their money back, they would be home. They would not be on those airplanes flying to all these different countries.

    Chairman BACHUS. Mr. Rogers, you suggest that with thousands of private investors operating worldwide, IMF services can better be provided by the private sector.

    Mr. ROGERS. The IMF is full of people that went to very fancy Ivy League schools, much to their credit, but they learned a lot of things which didn't happen to be correct, I am afraid, as we have seen from their history.

    After the Second World War when there were virtually no international capital movements, perhaps the IMF served a useful function. But now every day in the financial markets $1.3 trillion trades, every day in the world currency markets. That is just in the currency markets.

    And as you remember, the IMF was set up to take care of the fact that there were no currency movements after the Second World War. Well, now it is $1.3 trillion every day. What do we need the IMF for? There are plenty of MBAs. There are plenty of bankers. And I assure you if Chase Manhattan Bank has a problem with one of its loans, it goes in there and takes care of it. It doesn't need the IMF to show it how to take care of it, except when you have moral hazard. Now, at the moment when Chase Manhattan has a problem it knows it can get bailed out by the IMF.
 Page 103       PREV PAGE       TOP OF DOC

    The private sector can do a whole lot better job of taking care of investments. I would love it if every time I made a mistake with my investments I could come down here and say to you all, ''Look, I made a mistake; will you bail me out?''

    Mr. SANDERS. If you make sufficient contributions to the political parties, we can arrange that.

    Mr. ROGERS. I don't have enough money to contribute to all of you, I am afraid, but Chase Manhattan does, and some of the other banks.

    But the private sector—look, I have invested all over the world for 30-something years and I have seen countries—the world is littered with projects that were financed by supranational agencies, whether it is the IMF or the World Bank or whoever. Nearly all of them go bad.

    The ones that go right are the ones where private investors or the private sector goes in there and does it, because if you are talking about real money, if you are talking about my money, which is real money, then chances are I am going to make sure it goes right or at least I am going to do my best. If it is other people's money, Mr. Chairman, it rarely goes right.

    Chairman BACHUS. Thank you.

    Mr. Sanders.

 Page 104       PREV PAGE       TOP OF DOC
    Mr. SANDERS. Thank you, Mr. Chairman, and I really want to thank all of you for coming here today. What we are dealing with is an issue of enormous consequence. I mean it is not only a proposed $22 billion bail-out. It is what is going on in Russia. It is many of the concerns that we have about not only the IMF but the global economy, and you are touching upon some really important issues. Everything you say is going to be part of the record and it is going to be part of a very important discussion. So thanks very much for all of your testimony.

    Let me just pick up on a point that Mr. Rogers was making and start off by asking Dr. Weisbrot his view. All of us are aware that the Clinton Administration is pushing very hard for this $18 billion replenishment and it is fair to say I think Mr. Gingrich is also pushing for it and virtually every corporation in America that I know. I think they put full-page ads in newspapers telling us that the fate of the world is dependent upon passing this replenishment.

    Dr. Weisbrot, why is virtually every financial institution in the United States and every major multinational corporation desperate to get the United States Congress to pass this $18 billion replenishment, in your view?

    Mr. WEISBROT. Well, there are a number of reasons. One is that the IMF's credibility has been hurt by their failure in Asia and now Russia, but even before the latest meltdown in Russia the IMF's credibility was hurt and they see this organization as—well, the bankers certainly see it as a creditor's cartel, which is the function that it played in Asia.

    You know, a lot of people say, ''Well, what would have happened in the Asian financial crisis if we didn't have an IMF?'' Well, a couple of things would have happened. First of all, Japan proposed a $100 billion bail-out fund that didn't necessarily have the conditions attached to it that the IMF had and everyone else in the region joined on right away. And they proposed it very early, when the currencies were just starting to fall in August of 1997, early enough so that probably it could have even prevented the crashes of the currencies and certainly could have prevented the crisis from spreading from the financial sphere to the real economy and the depression that resulted.
 Page 105       PREV PAGE       TOP OF DOC

    You see, the IMF is not really a lender of last resort and it never has been, and you can see this in both the Russian and the Indonesian case especially. By March of 1998 they had only released $3 billion to Indonesia. So it was way too little and too late.

    But what they did do was negotiate an agreement so that the governments of Indonesia and South Korea, who had the biggest debts, would guarantee the debt of the private banks—the foreign banks, that is; domestic banks took losses. But the foreign banks—U.S., German, Japanese banks—did not have to write down any losses because of the IMF's organization of these negotiations.

    If it were not for that and if the Japanese fund had actually provided the liquidity and the reserves that these countries needed to avoid the real crisis in the first place, you would have seen losses. You would have seen negotiation taking place and they would have written down some losses.

    Mr. SANDERS. Thank you. I didn't mean to cut you off but I wanted to ask Dr. Reddaway, if I was an average Russian citizen and maybe a worker who had not received a paycheck for many, many months or an old person who was not getting a minimal amount of money to take care of my needs and I saw my government providing huge interest rates to foreign investors, I might have a little bit of a concern about that set of priorities.

    Do you have any idea—does anybody have any idea, and I will open it up to anybody but start with Dr. Reddaway—as to how much—we know that in recent weeks and months some investors have lost substantial sums of money but, on the other hand, there were some of these institutions receiving huge interest rates being backed by the IMF. Does anyone have any idea? It was a very lucrative market for folks to make a whole lot of money. Do people want to comment on who made the money, how much, while Russian people were going hungry and without paychecks? Maybe Dr. Reddaway and Dr. Cohen, maybe you want to answer.
 Page 106       PREV PAGE       TOP OF DOC

    Mr. REDDAWAY. I am afraid I cannot give you any figures. Certainly inside Russia the so-called financial oligarchs made very large sums of money indeed by buying government bonds and also, as I mentioned in my testimony, by handling government accounts, bank accounts.

    Mr. SANDERS. Can you tell us what those interest rates on the bonds were that they were purchasing? Four percent? Six percent? What were they exactly? Do you know?

    Mr. REDDAWAY. I don't think there were ever any as low as that. I think the lowest was about 14 or 16 percent.

    Mr. SANDERS. And a lot higher than that, if I am not mistaken.

    Mr. REDDAWAY. And most of them, of course, far higher. I cannot give you details, I am afraid. Maybe somebody else can.

    Mr. SANDERS. Let me ask Dr. Cohen.

    Mr. COHEN. The GKOs and OFZs are short-term Russian debt paper. The ones who were ideally situated to benefit from that short-term bond—and we are talking six-months-to-a-year bonds—the ones who were ideally situated to benefit from that were Russian banks.

 Page 107       PREV PAGE       TOP OF DOC
    The Russian banks have tremendous political clout. The legal system was such that it allowed interaction between the banks and the government, the Ministry of Finance and the Central Bank, without the impediment of supervisory frameworks that we have in this country. The Russian banks, I should also mention, financed President Yeltsin's reelection campaign in 1992.

    So these are the ones who benefited from astronomical interest rates.

    Mr. SANDERS. Not uncommon to be over 100 percent; is that correct?

    Mr. COHEN. Including over 100 percent, sir. The lowest I have seen the interest paid on GKOs was 18 percent, and this was in 1997 when the Russian government tried to push it down. But before that, before the election campaign of 1996 and toward the current crisis, on both ends of this time period, you saw interest rates up to 200 percent a year.

    There were some attempts by Western brokers and investment firms to benefit from that. What is the success rate of the Western investors, I do not know. What I do know is that every time I meet a Russian colleague, I ask them two questions. One, ''Did you invest into GKOs and did you make any money?'' And two, ''Are you playing the Russian stock market?'' I never met a Russian who claimed to me that they either played the GKO, the government bond market, or the Russian stock market. So your guess is as good as mine who was playing it.

    Mr. SANDERS. So what we are saying is presumably some people made a heck of a lot of money. We just don't know at this point.
 Page 108       PREV PAGE       TOP OF DOC

    Mr. COHEN. Well, we assume it is the Russian banks and possibly some well connected Western investment firms in Moscow.

    Mr. ROGERS. But it was mainly the Russians who got the money. For a while, Western banks were making money but then they got sucked in and, in the end, Western banks lost more money than they made. You asked earlier why they are putting these ads in the paper. They are hoping to get bailed out at this point. They would love for you to put all this money up so they can get bailed out.

    And by the way, if you do put $22 billion in, then you are going to have to deal with Uzbekistan and Kazakhstan and the Ukraine and all the neighbors, because they are in the same kind of problem and they are going to be coming down here the next week and say, ''Listen, guys, you bailed out Russia. Now what about us? We have the same problems, too.''

    Mr. SANDERS. Mr. Rogers a moment ago talked about so-called moral hazard and I happen to agree, as somebody who opposed the Mexican bail-out and feared very much that would be the beginning of the end, and in many ways it has transpired that way; does anyone disagree with his assertions about the so-called moral hazard? Has it been dangerous for the world economy that we guarantee loans, no matter how speculative, how dangerous, how irresponsible, that we say to these large institutions, ''Don't worry; the IMF is there to back you up?'' Is his assertion correct?

    [Witnesses nod in agreement.]

 Page 109       PREV PAGE       TOP OF DOC
    Mr. ROGERS. May I just say one other thing? You said they are taking out these ads saying ''we must do this because things will get worse if we don't do it.'' Yes, things will get worse if you don't do it. What I am afraid of is that if you do do it, they will get worse and worse and worse, because the next bail-out is going to be even bigger, and then the next bail-out after that. And then there is going to come a time when they are going to throw out every congressman in the land because they are going to say, ''You guys kept putting up the money and now we realize we have lost a lot of money.''

    So sure, bite the bullet now, though, because if you don't bite the bullet now, you are not going to be in Congress the next time it comes around or the time after that.

    Mr. SANDERS. Thank you, Mr. Chairman.

    Chairman BACHUS. I thank the panel for testifying. Your testimony was very thoughtful and very helpful to us. Thank you.

    We are going to take a five-minute break and then the third panel. If the next panel wants to go ahead and be seated, that would be fine, too.

    [Recess.]

    Chairman BACHUS. We are going to reconvene the hearing at this time. Mr. Sanders is going to introduce the panel.

    Mr. SANDERS. Thank you very much, Mr. Chairman.
 Page 110       PREV PAGE       TOP OF DOC

    I wanted to really thank our two panelists, who have come a very long way to be with us. And while the room is not filled, I want to reiterate what I said a few moments ago. Your testimony is extremely important. Your testimony may be the most important testimony that we are going to hear today, because you are on the ground in Russia. We have had a whole lot of very fine minds here discussing it but you guys live there, are experiencing what is going on.

    Everything that you are saying is going to be part of the record. That is what that woman over there does. And it is going to play a very important role in helping the United States Congress to determine what our policy toward the IMF and Russia should be. So I just wanted to thank you both.

    Mr. Chairman, I know Dr. Kagarlitskly more than I do Dr. Illarionov and I did want to mention at this point, and maybe Boris would want to say a word or two about it, this gentleman has been in jail on several occasions, both under the former communist regime and more recently, as I understand it, under Mr. Yeltsin. So you must be doing something right. Maybe you want to say a few words to that effect.

    Thank you very much, Mr. Chairman.

    Chairman BACHUS. Thank you. Dr. Illarionov, as Mr. Sanders said, we very much appreciate your traveling here from Russia. Your remarks have been distributed. There were about 30 newspaper reporters here and they have your remarks and we will be taking down your testimony and reviewing it. So proceed at this time.

 Page 111       PREV PAGE       TOP OF DOC
STATEMENT OF DR. ANDREI ILLARIONOV, DIRECTOR, INSTITUTE OF ECONOMIC ANALYSIS, MOSCOW, AND FORMER CHIEF ECONOMIC ADVISOR TO PRIME MINISTER VIKTOR CHERNOMYRDIN

    Dr. ILLARIONOV. Thank you, Mr. Chairman, ladies and gentlemen. I am very grateful for the invitation and for the possibility to share with you my remarks on relations between the International Monetary Fund and Russia in recent years.

    Since the Russian Federation became a member of the IMF on June 1, 1992 Russia has received financial assistance from the IMF through two standby arrangements, through two purchases of Systemic Transformation Facility, STFs, and through Extended Fund Facility.

    As of September 1, 1998, the combined total of credits provided to Russia by the IMF is $14.2 billion, special drawing rights worth approximately $19 billion U.S., a sum roughly equal to 328 percent of the Russian quota in the IMF. In absolute terms, Russia is currently the IMF's largest borrower. In relations to its quota, Russia is the fifth largest borrower.

    The IMF's policy toward Russia deserves both praise and criticism. However, as is often the case, the Fund is frequently applauded when it does not merit praise and criticized for actions and policies that are quite appropriate.

    First of all, I would like to say that it is quite difficult to blame the Fund for the shock therapy in Russia due to the fact that Russia never experienced shock therapy. I have to say that by any possible criteria, Russian economic policy never was shock therapy policy, because shock therapy assumes that it should be imposing hard budget constraints and hard monetary constraints on economic policy.
 Page 112       PREV PAGE       TOP OF DOC

    Russia never ran a small budget deficit or a balanced budget, as it is in the moment in the United States. All the time the budget deficit in Russia was between 7 percent of GDP in the best cases up to 30 percent of GDP, which cannot be considered as shock therapy. And 30 percent of GDP was the case in 1992 when many people believe that it was shock therapy. It was not a shock therapy.

    And, at the same time, the rate of money creation, money emission and subsequently rate of inflation was extremely high, measured in hundreds and thousands percent per year, which cannot be considered as shock therapy in any case.

    I also would like to attract attention of the audience that life expectancy, especially male life expectancy in Russia, does not fall at the moment. It stopped falling in 1994 and since 1994, for four consecutive years, male life expectancy is increasing quite substantially, still from the very low level.

    IMF policy toward Russia deserves praise for so-called education in basic economics of Russian political elite, Russian authorities. And due to these efforts, several people in Russian authorities started to understand much better basic economics than before.

    Also, IMF professionals have also played a significant role in helping their Russian colleagues to adopt the internationally accepted statistical reporting standards. Since April 1996, the IMF's official publication, ''International Financial Statistics,'' is publishing Russian data, which is now prepared in accordance with international economic and financial requirements. As a result, Russian authorities also now regularly release statistics on Russia's economic, monetary, foreign exchange and financial situation.
 Page 113       PREV PAGE       TOP OF DOC

    And it is difficult to overestimate the significance of this fact, because it became an important contributor to the eventual fall of the so-called Iron Curtain that blocked the information about Russia's economy from the Russian public, a well as from the rest of the world.

    At the same time, on the other hand, the IMF's attitude toward economic policy carried out by the Russian authorities was and remains timid, inconsistent, and subject to permanent compromise. In Russia, the Fund does not apply the universal and equal criteria that are used in Fund programs in other countries. Fund representatives negotiating with Russian officials have almost always been willing to compromise not only on the conditions generally imposed on other countries but also on those previous developed specifically for Russia.

    The marked softening of conditions set forth in original agreements between the Fund and the Russian authorities, the constant revision of conditions stipulated in initial agreements, as well as criteria and requirements, have become an unfortunate tradition in the IMF.

    Unfortunately, not a single one of the IMF programs developed in coordination with Russian authorities has been executed in full. For example, you can see Table 1, an attachment to my testimony. You will be able to see the numbers.

    Despite this fact, the IMF continued to provide larger and larger credits to Russia, and also you can see the numbers in the next table. This approach has led to serious tensions among other IMF member-countries who were concerned about the special privileges enjoyed by Russia which were not conditional upon the implementation of specified performance criteria.
 Page 114       PREV PAGE       TOP OF DOC

    However, the most important negative consequences of the Fund's approach have been felt in Russia itself. Decisions to provide financing for Russia, motivated by political rather than economic considerations, have given rise to the problem of moral hazard. For several years, the Russian government and Russian society, not only international investors, as a whole turned out to be effectively spoiled, as they have been granted unearned financial assistance. As a result, Russian economic policy has not only been inconsistent, but it has seriously diverged from the economic policy conducted in the majority of countries in transition, having become even more irresponsible than it was before. The decision of the Russian authorities of August 17 is one of the clear signs of such irresponsibility.

    There are numbers of facts which I put in my text showing some mistakes in the IMF's approach toward Russia but clearest example of the misguided approach to Russia is and was the collapse of the program approved by the IMF board on July 20 this year. The program has failed so quickly and so obviously because it was based on wrong assumptions, it set unrealistic targets, it provided misguided policy recommendations. Moreover, IMF money was given in the wrong direction. Let me elaborate briefly on this idea.

    The Fund program was based on a very doubtful assumption, that it was possible to roll over the main bulk of domestic debt maturing in the fall of 1998. In the summer of this year this assumption became evidently unrealistic because of the clear unwillingness of investors to purchase Russian debt securities with annual yields less than 70 to 80 percent.

    And, at the same time, overall monthly obligations of the Russian federal government were $60 to $80 billion a month and approximately $40 to $45 billion obligations only to service debt. At the same time, overall budget revenue was on the level of $21 billion rubles a month. It was absolutely clear that it was impossible to continue such a policy.
 Page 115       PREV PAGE       TOP OF DOC

    The Fund program set a number of unrealistic targets to be met by the Russian authorities, including such targets like rate of inflation, rate of real GDP growth, trade balance, foreign exchange reserves.

    But the most serious mistakes were made by the Fund in defining targets for the exchange rate and fiscal policies. In this program, exchange rate was projected to be on average 6.2 rubles per dollar in 1998 and 6.5 rubles per dollar in 1999. In reality, the exchange rate of the ruble fell to at least 20 rubles per dollar in early September trading, just one and a half months after the IMF board has approved the program.

    The basic reason for that was a steep fall in gross reserves—foreign exchange and gold—which were projected by the Fund to increase to almost $30 billion by the end of the year. In reality, reserves fell from approximately $19 billion in mid-July to $15 billion in mid-August and to $11 billion in early September. As a result, the basic monetary equation, foreign exchange reserves to monetary base, fell sharply to 30 percent, which made the devaluation of the ruble absolutely inevitable. And it was absolutely clear, not only in August and September; it was absolutely clear in April, May, June and July, before this program was approved.

    Another target, the target for revenue collection by the Russian federal budget, this target assumed an increase in monthly collection of revenues from roughly $21 billion rubles a month in the first half of the year to approximately $29 billion rubles a month in the rest of the year, which means increase in real terms by 34 percent almost overnight.

 Page 116       PREV PAGE       TOP OF DOC
    And at that time it was very well known that the Russian economy started to decline and real GDP fell by 4.4 percent in July only.

    Finally, the latest package prepared by the Fund also included inappropriate policy recommendations for the Russian authorities in two crucial spheres—exchange rate policy and fiscal policy.

    As for the exchange rate policy, the Fund approved devaluation of the ruble and was insistent on continuing the monetary and exchange rate policy.

    As for the fiscal policy, the Fund program stipulated increase in revenues, not reduction in expenditures. It is a very wrong prescription which was not possible to meet that led to aggravation of the crisis in July and August.

    The mistakes made by the Fund in its program of July 20, 1998 led almost immediately to the worsening of the macroeconomic situation in Russia. That is why, not surprisingly, within three weeks, even before decisions of August 17, within three weeks after the IMF board decision, the main indicators of financial markets in Russia were substantially worse than they were three weeks before that decision. And you can see this from my tables, these numbers.

    Between July 20 and August 17 the stock market fell by 43 percent and by another 42 percent by this date. The ruble exchange rate for the last one-and-a-half months fell by 71 percent. According to the preliminary data from the Russian Ministry of Finance, the total federal budget revenue in August was $16 billion rubles, which means that it decreased by roughly 30 percent in real terms, not increased by 35 percent as was envisaged in the program.
 Page 117       PREV PAGE       TOP OF DOC

    Attempts to implement the wrong program caused that the $4.8 billion tranch given to the Russian authorities was spent in less than a month, not on softening Russia's debt servicing problem but on defending an unrealistic, overvalued exchange rate; for example, mainly on subsidies for domestic and international investors that were in a hurry to leave the Russian debt and equity markets.

    Attempts to implement the wrong program elaborated by the Fund and proposed to the Russian authorities have contributed to the decisions of the Russian authorities of August 17 to devalue the ruble, to default on ruble-denominated debt, and to announce a 90-day moratorium on servicing dollar-denominated debt by the Russian private entities. As a result, the largest financial assistance package in the IMF history has failed in less than a month.

    To conclude, it is necessary to call who should be blamed for the recent financial, economic and political crisis in Russia. Certainly the main responsibility is the responsibility of the Russian authorities, first of all of the government of Mr. Chernomyrdin, which was conducting the irresponsible budget policy for five-and-a-half years.

    It is also the responsible policy of the Russian Central Bank, headed by Mr. Dubinin for the last few years when, in 1997, the Central Bank has squandered foreign exchange reserves of the country of an amount of approximately $20 billion. That is why it is not surprising that these $4.8 billion was squandered in just a month or even less than a month.

    But, at the same time, this responsibility should be shared with the International Monetary Fund, which has prepared this program.
 Page 118       PREV PAGE       TOP OF DOC

    And, at the same time, this responsibility should be shared to some extent with the current U.S. administration, which was pressing the IMF to ''rev up negotiations with Russia'' in early July. I am not saying that the IMF alone would not be willing to make compromises with the Russian authorities, but this intervention from the U.S. administration helped a lot and has contributed to the aggravation of the economic and financial crisis.

    My final sentence will be to ask the honorable Members of the U.S. Congress to really help Russia, which means to do everything possible to stop unearned, unconditional financial assistance from the IMF to the Russian authorities. Such financial assistance reduces unfortunately only a handful of consequences. This assistance has effectively spoiled the Russian government and the Russian society. If you and if we would like to see Russia as a stable democratic country with effective market economy, this unconditional and unearned financial assistance should be stopped. Thank you, Mr. Chairman.

    Chairman BACHUS. Thank you.

    Now Dr. Kagarlitsky.

STATEMENT OF DR. BORIS KAGARLITSKY, ADVISOR TO THE RUSSIAN DUMA AND SENIOR RESEARCH FELLOW, INSTITUTE FOR COMPARATIVE POLITICAL STUDIES, RUSSIAN ACADEMY OF SCIENCE

    Dr. KAGARLITSKY. Thank you, Mr. Chairman, ladies and gentlemen.

 Page 119       PREV PAGE       TOP OF DOC
    First of all, I want to stress one point. Already in the letter which I have which invited me to the hearing, it was mentioned the term ''aid,'' ''aid package to Russia.'' Well, IMF projects, IMF credits are not aid. We have to pay. We will pay, or at least we are supposed to pay for that. In fact, IMF policies forced Russia to be more in debt than it was originally.

    Also it is very important to point to the fact that now there is a tendency to divide responsibility in the sense that all the errors, all the mistakes, all the stupidities were committed by Russians, by the Russian government, by Russian bureaucrats, and so on. And, on the other hand, the IMF and its representatives are almost innocent, something like doing everything right by—it is not only that the operation was a success but the patient died, but also it was the wrong patient. The patient did everything wrong, so he died and we did everything right.

    Well, of course, I do not deny the fact that the Russian government did all possible stupidities that one can imagine and even certain stupidities which one cannot imagine, but still it was the IMF which was the Western institution with which all these so-called decisions were coordinated and discussed.

    It is also important to understand the kind of psychological and ideological role which IMF played in Russia during these years, because the IMF was presented as a sort of guiding force, very much in agreement with the traditional communist vision of the guiding force. Like the old communist party internally played the role of the guiding force, now it was the IMF which played this role.

 Page 120       PREV PAGE       TOP OF DOC
    And during a certain period of time, as a professional I always was shocked meeting Western colleagues which were parachuted to Russia by IMF, usually coming for two or three days to teach us everything, without even knowing a word in Russian, without knowing anything about Russian economy, without ever even being interested in learning anything about the Russian economy, just to teach Russians about Russia. Well actually, people started joking that they came to teach us how to ruin our economy, which was a success.

    I also want to stress that that was a sort of historic punishment for us as Soviets in the sense that we did the same to our allies in the 1950's and 1960's. We sent our Soviet advisers to the countries of the so-called Communist Bloc to help them ruining their economics and we did that with a lot of success, actually.

    So now we had to experience that same thing on ourselves and I should say that was not nice. So maybe that is the historic punishment we deserve.

    Also, it was very much like the argument of the old communist propaganda, the way IMF and their supporters in Russia behaved, because every time they met with any criticism, that criticism was rejected as an obstacle to reform and those who criticized them were seen as enemies, as enemies of reform, and sometimes even traditional Stalinist language was used.

    At the same time, it was another very typical Soviet propaganda trick which was used that every time when something was a success, it was because of the wise leadership of the IMF and every time something went wrong, it was because of the particular errors committed by particular individual bureaucrats or particular individual decisionmakers. That was exactly the old Soviet trick which we experienced for years and years up to the moment when the whole Soviet Union collapsed, and now it is very much the same situation.
 Page 121       PREV PAGE       TOP OF DOC

    So I think that the problem is not with specific errors but with the whole policy approach and I think that there were true basic problems with the IMF economic philosophy as it was used in Russia.

    First of all, they thought the privatization of the economy automatically, by definition, would provide a more efficient and more dynamic economy, without any other conditions being provided. And the second point was that they were sure that a stable ruble, by definition, would provide economic growth and economic success. So if you get the ruble stable in respect to the dollar, then by definition everything will go well, so there will be economic growth, there will be investment attracted, and so on. Nothing like that happened.

    Let's start with privatization, because it was mentioned already, that from a moral point of view, OK, the oligarchs got everything; from an official point of view, that it is unfair and unjust and so on.

    That is all true and I very much share these criticisms. But I think the main problem was not here. The main problem was elsewhere, that the privatization was a failure economically from the point of view of economic efficiency. That was the main problem because, OK, we could imagine that could be very unjust, very unfair, but imagine that the economy immediately started improving; imagine that economic performance of the enterprises improved.

    Well, OK, we could probably tolerate the injustice in this case, but that was not the case. That is important to mention, because I don't care about guys buying something in the French Riviera. Why not? The problem is that everything else goes to the dogs.
 Page 122       PREV PAGE       TOP OF DOC

    So why enterprise performance deteriorated? That is the problem. And the answer was given already before the reform, that it would deteriorate because already, as early as in 1991 before the privatization started, there were certain calculations showing that the real demand for property, for buying out state assets by the Russian population, based on legal incomes of the Russian population, was about 1 percent of the total state-owned economy. If we consider also illegal income which existed in the Soviet Union already, because the black market existed in the Soviet Union for years, then it would be probably another 5 percent and the international demand for Soviet assets would be something like another 10 or 15 percent—we cannot say, but not more than that.

    So it means that if the economy would be privatized, the market place, based on the market criteria, based on the criteria of efficiency, of investment, and so on, it would be more or less about 15 to 20, maybe 25 percent of the economy and the rest remaining in the public sector in one way or another.

    At the same time, the policy of IMF, as well as the policy of the Russian government, was to speed up privatization as soon as possible, because they thought that privatization was a criteria of success. And Chubais, for example, Mr. Chubais, always presented once again very much in the Soviet way, presented the figures of privatization of a criteria of success, saying we privatized that percentage of the economy and that means we are successful. It doesn't mean that we are successful. We want to know what was the success of privatization case by case. Were the enterprises successful? Did they start to work better or not? The quantity of privatized enterprises, those figures do not tell us anything.

 Page 123       PREV PAGE       TOP OF DOC
    Actually, while you do not have real demand for property which can be backed by real money, by real investment, at the same time you want to give the property away, you have to give it away to particular individuals. All sorts of tricky schemes were established to give it away. All sorts of bribes and corruption cases emerged out of that, because then it was bureaucratic redistribution of property.

    If nobody can really buy, it is for me as a bureaucrat to decide who will be the owner. So the entrepreneurs de facto were appointed, though very often it was presented in a different way, but de facto they were appointed. That is where the oligarchs came from.

    And, of course, that also led to the appearance of the whole class if you want or the whole layer of irresponsible owners who never earned their money to buy the enterprises, who never created their businesses. And, at the same time, they had no money to invest in modernization of their businesses, to improve the performance of their businesses, so they kind of exploited the businesses as resources. They used the enterprises as the sources of financial resources for themselves, for their personal enrichment. That was the only way they could use these enterprises.

    Also, foreign advisers who helped organize Russian privatization never seriously considered the structure of Soviet enterprises and Russian or Soviet labor relations, because that was something very important to consider. Soviet enterprises were created as part of the state, not just being owned by the state, like enterprises are owned by the state or the public sector in some capitalist countries, but they were part of the state, part of the structure of the state. And social relations were linked to enterprises.

 Page 124       PREV PAGE       TOP OF DOC
    In that sense, privatizing a big enterprise like Vas in Talieti would be like privatizing the whole of Washington, DC., because people were just connected to the enterprise. And, of course, you will end up having some kind of semi-feudal type of ownership, which will not be efficient.

    With the money, something very similar happened and that was discussed in detail by other participants. I just want to stress one point, that while IMF experts insisted on the budget deficit being something very negative, they insisted on printing money being something very dangerous, the cause of inflation, and so on, they never pointed to the fact that state borrowing was also dangerous.

    So in that sense, the state was encouraged to borrow money rather than to print, but the consequences were very much the same. It was the other way to do the same. And it is very characteristic that the Russian government even included IMF credits in their income part of the budget. It was shown as state revenues. That was the way it was presented to the State Duma in 1997.

    And, of course, it is quite understandable that taxes never came from the enterprises owned by these people and at the same time people opinion became very negative to the reforms. Once again, Dr. Lipton here pointed to the fact that private property became kind of a positive thing in Russia. Well, as a sociologist I should say that this is not true. Actually the attitude toward private property now in Russia is worse than it used to be before the reforms started.

    As a Russian joke tells you, Yeltsin, within seven years, managed to do something that the communists failed to do within 70 years—he made communism look good.
 Page 125       PREV PAGE       TOP OF DOC

    So now coming to the current crisis, first of all, I think that being in this country now for me is a serious moral problem, because the way American experts and advisers behaved in Russia, it was so devastating for everybody who was kind of Westernized or modernized in Russia that they really generated a lot of hostility to everything American, everything Western in Russia and even to those Russians who were kind of westernized or Americanized but who were critical of the practices they carried out.

    In that sense I can also quote another joke which I have heard in Russia, that throughout the 1990's there were two currents of thought in the United States about Russia. There were people who thought that Russia should be helped and there were others who thought that Russia should be destroyed, and both of them advocated the same policies.

    So now we have to face the consequences. And I think, first of all, I really, really ask you, as representatives of the American public, just please stop teaching us, first of all because we see the results, which are not very encouraging.

    And second, we know a lot about our country and we are capable of doing something ourselves and we really have to find the solutions ourselves. And in that sense it is better to leave us alone at the moment. It doesn't mean that we have to be isolationist. On the contrary, I think we shouldn't be isolationist, but it is better when we settle our problems ourselves.

    And in that sense another thing I have to say, no money to the Russian government, please. For example, Dr. Illarionov and I represent very different political opinions but I think here we will agree, because I think any responsible Russian expert, Russian academic now knows that this money just destroys everything in Russia. It goes into corruption. It goes into stimulating irresponsibility of the government. It goes into keeping in power the administration which people do not want to have.
 Page 126       PREV PAGE       TOP OF DOC

    And second, if somebody is really interested to help Russia nowadays, it is not money that is needed; it is food that is needed, especially in particular regions like Kaliningrad and Mormask, where the situation is really getting dramatically worse. It is really a serious problem. There is really a danger of famine there.

    Probably Moscow, it is not the case. Moscow will not starve. Leningrad and St. Petersburg will not starve, I hope. But there are certain regions where the danger of famine is absolutely real. And in this case money is not needed. Money will be stolen. Food is needed, also because it is more complicated to steal and also because that can be controlled. That is easier to control and it should be worked directly with the local governments, with local administration and local public, local social organizations to deliver the food directly to the people who need that food.

    And in that sense I think that Russia, of course, needs real help, but Russia does not need somebody to teach us how to destroy our economy. We can do it ourselves. Thank you.

    Chairman BACHUS. Dr. Illarionov, did you agree with him when he said that the Russian government counted the IMF funds as income? I notice you were shaking your head about that.

    Dr. ILLARIONOV. You mean the interview with Mr. Chubais?

    Chairman BACHUS. Your colleague's testimony was that the government counted the IMF loans as revenue.
 Page 127       PREV PAGE       TOP OF DOC

    Dr. ILLARIONOV. Yes. I have to say, to the best of my knowledge, the Russian authorities never put IMF money on the revenue side of the federal budget. All the time the Russian authorities put IMF loans, expecting loans and actually receiving loans, on the side of financing the budget deficit.

    Maybe in some journalist's articles these monies were mentioned as revenues, but in official documents, I have never seen in my life that these monies were on the revenue side.

    Dr. KAGARLITSKY. I am sorry; I saw that myself in the Duma. Of course, we have now to discuss these things, but that was one of the things which was discussed in the Duma, which was exactly the fact that the government-proposed budget in 1997 contained money from IMF not as financing the budget deficit but as revenues.

    Well, probably we discussed different budgets in different years, because things change in different years, but that was my experience.

    Chairman BACHUS. Mr. Sanders.

    Mr. SANDERS. Thank you, Mr. Chairman.

    If I might start by asking Dr. Illarionov a question, as I understand it, you have suggested the possibility of a swap which would exchange nuclear weapons, Russian nuclear weapons and materials for Russian debt. Can you discuss that a little bit, please?
 Page 128       PREV PAGE       TOP OF DOC

    Dr. ILLARIONOV. Yes, you are correct, sir. It is an idea which I am trying to propose to everybody on the Russian side and on the American side, to consider the real severity of the Russian financial and economic crisis and how the United States can really help Russia in the longer term perspective.

    From my point of view, the basic roots of the current and very long and very deep economic and financial and political crisis in Russia is the gap, substantial gap between political ambitions inherited from the past and the very narrow economic base of Russia. And three factors have contributed to a very high extent to keeping such a gap for a long period of time.

    One of these factors is IMF financial assistance, which made Russian authorities feel that they can do everything they would like to do, regardless of the economic policy.

    The second is huge natural resources of oil, gas, metals, and so on, which gave Russian authorities huge amounts of financial resources to conduct irresponsible economic policies.

    And the third factor is nuclear weapons, which are inherited by the Russian authorities from the past. To my knowledge, the nuclear weapons in the last six years were used by the Russian government not as a means of security, not an instrument of national security, but as an instrument of blackmail, blackmailing, first of all, the IMF, G7, U.S. and other countries and neighboring countries to get more financial assistance.
 Page 129       PREV PAGE       TOP OF DOC

    That is why, from my point of view, it would be much better first of all for Russia, not only for neighboring countries, not only for the U.S. and for other countries of the world but first of all for Russia, to reduce the possibility to use nuclear weapons as a blackmail instrument. And that is why I started to say how to reduce these stockpiled weapons.

    And, at the same time, it is understandable that the current level of the foreign debt of Russia, Russia will not be able to repay and service in any foreseeable future. And it is a real constraint for stable development. That is why my idea to make a swap of the substantial portion, not all, as it is understandable, a substantial portion of nuclear weapons for a substantial portion of the foreign Russian debt.

    Mr. SANDERS. Is there any support for that concept in Russia?

    Dr. ILLARIONOV. It is quite difficult to persuade people, especially in Russia, about this idea, but I think many things are quite difficult to understand and to accept in Russia, but sooner or later people would understand that it is impossible to have such a heavy burden with such a narrow economic and financial base.

    Mr. SANDERS. Thanks very much for those thoughts.

    Dr. Kagarlitsky, you touched on a very fascinating issue. I mean, we all recognize that the Soviet Union's economy was enormously inefficient and so forth and so on, but yet they fed their people; they were a major industrialized nation.

 Page 130       PREV PAGE       TOP OF DOC
    Talk about two things very briefly. The Soviet Union had enormous wealth in their publicly owned infrastructure, which they no longer have, and where did that go? What is happening to the economy today? It is one thing to talk about people not being paid, old people not having any pensions, but Russia is not producing very much anymore. They are importing, as we understand it, a substantial part of their food and other products that people need on a daily basis.

    What happened to the productive capability of Russia in such a short period of time?

    Dr. KAGARLITSKY. Well first of all, about Russia not producing, we must remember about one factor which is very important, which is the black market or the black economy in Russia. While legally Russia is not producing, illegally Russia is producing.

    And, by the way, when people blame the mafia, they should not forget one thing, that given the circumstances, in many cases for Russians, dealing with some mafia-controlled businesses is the only way to survive.

    By the way, we say people don't get wages but they are not dead, so how do they survive? It means that quite a lot is done through the black market economy, and that is one of the reasons why the mafia is flourishing. And that is one of the reasons why the mafia is not necessarily seen by people as something negative, because while the state does not care and the legal private business does not care, it looks like the mafia cares because it provides them with certain jobs, and so on.

 Page 131       PREV PAGE       TOP OF DOC
    So if we want to deal with the problem of the mafia, we also must resolve the social problem. We must create legal jobs for the people and legal income, and so on.

    So in that sense probably if we adjust the figures considering their level of black market production——

    Mr. SANDERS. So there is more production going on than we know of.

    Dr. KAGARLITSKY. Yes, yes, I am sure, including certain things which are sold on the market as imported goods. Probably they are not imported and really they are illegally made and pirated inside Russia and these are just fake brands which are made inside the very same country. So that is about the Russian economy not producing.

    And about where the wealth went to, you know, in one of the Russian newspapers I have just read one report, which gives us a very good insight into this. There was an enterprise where workers were not paid for sometime and at the same time, some merchant, some small private businessman, appeared buying some materials, some metal from anywhere, just buying metal, which should be later reprocessed somehow.

    And, of course, workers from this enterprise started destroying their own machinery in order to get the precious parts to sell as metal to this petty merchant. As a result of that, for example, three workers were caught. They earned something like—well, it was a good sum of money, something like 300,000 old Russian rubles, and the damage they inflicted on the enterprise was something like $5 billion old Russian rubles.
 Page 132       PREV PAGE       TOP OF DOC

    And that is the story of Russian privatization, in fact. That was how it was carried out. People didn't want to destroy their country. Even the worst among these oligarchs, they didn't have in mind that they wanted to destroy the country, to damage everybody. They just didn't care. They cared about something else.

    Mr. SANDERS. My last question, let me throw it out.

    Dr. Illarionov, did you want to answer?

    Dr. ILLARIONOV. Excuse me, sir. If I may?

    Mr. SANDERS. Please.

    Dr. ILLARIONOV. A few words about the real size of the Russian economy. It is quite clear that the size of the Russian economy now is overestimated by Russian Statistical Committee, by the International Monetary Fund and by the World Bank. The reason is quite clear. On the contrary to the national accounting standards accepted in most countries of the world, the Russian Statistical Committee includes into the national GDP figure its own estimate of the so-called shadow economy and every year this estimate is changing from one year to another.

    It is just not calculations. It is not reporting data. It is just assessments. It is estimates of the shadow economy which is included into the GDP, and that is why the official GDP is at least 30 percent higher than it is in reality. That is why people in many countries of the world, the international audience, have a little bit misleading impression about the real size of the Russian economy.
 Page 133       PREV PAGE       TOP OF DOC

    Mr. SANDERS. Thank you.

    My last question, Mr. Chairman, is for both of our guests. Is laissez-faire capitalism the only future for Russia or might there be a mixed economy with public and private ownership? Is democracy—we have countries in Scandinavia which have Democratic Socialist governments for decades who are, in many respects, more democratic, more citizen participation than in the United States.

    Is going from the extreme of communist authoritarianism to laissez-faire capitalism the only direction or might there be some middle approach?

    Dr. ILLARIONOV. I don't like some titles, laissez-faire or some other type of capitalism. But if we would distinguish between maybe two extremes of market economy, which we can observe in the world, we can easily find the countries with substantially higher levels of redistribution of national income through government have usually substantially lower rates of economic growth, substantially low rates of growth of living standards of the population.

    And unfortunately, when such countries like Sweden, which for a number of years was trying to implement the system which is very well known as Swedish socialism, fell from the third place in Europe in the late 1960's to one of the lowest places now, it is a very long and very serious Swedish disease.

    Unfortunately, Russia has a substantially low level of economic development measured as GDP per capita, substantially lower than in Sweden, but Russia, at the same time, has the ratio, the share of GDP consumed by the government on the level of Sweden. About 60 percent of GDP is spent by the government, by the general government on the federal level, on the regional level.
 Page 134       PREV PAGE       TOP OF DOC

    For such a country like Russia on such level of economic development, it is absolutely not sustainable. And all these crises which we are experiencing for not only the last seven years but for the last 15 years, maybe since the early 1980's, since even from the period of the Soviet Union, it is a crisis of very high government burden on the economy. The Russian economy is not so developed as the Swedish one and certainly not like the U.S. economy, but the U.S. economy provided only 30 percent for government redistribution. In the Russian case we have 60 percent.

    That is why when we shall be like you or like Sweden—I don't know in how many decades—maybe after that we can try the same level of government spending. Before, unfortunately or maybe fortunately for us, we have to spend exactly—take from the economy, not destroying it, not ruining it.

    Mr. SANDERS. Thank you.

    Dr. KAGARLITSKY. So it is now my turn and, as I already said, Dr. Illarionov and I represent different currents of opinion in Russia.

    So first of all, I want to say that if we consider growth rates not just for the last decade or two decades but for the whole period of the 20th century, the picture would be very different.

    I also want to stress, for example, that if we speak about the same case of Sweden, most of the Swedish decline happened during conservative administrations or during the period when a Social Democratic administration, conservative administrations changed very fast.
 Page 135       PREV PAGE       TOP OF DOC

    By the way, the Czech Republic, which is sometimes presented as a success case in Eastern Europe, in Central Europe, is exactly the place where IMF recommendations were not carried out properly, and that is probably why they were so successful, because, for example, the level of redistribution in the Czech Republic under Vaclav Havel for most of the period when it was considered to be a success case, because now it is not anymore, but for that period it was exactly about 60 percent.

    But I think this is not the problem anymore, because I am actually, to be honest, a little bit shocked by the ideological intensity of the debate here, because in Russia people do not speak so much about socialism and capitalism. People speak about more concrete things, because we have more concrete problems.

    And here I hear almost every second speakers starting with some kind of reference to capitalism or free market economy or democracy, very much like in the Soviet times I remember every speaker addressing some kind of party meeting and starting with some kind of praise of communism and the party and our sacred principles, which I personally find somewhat dangerous. We should be rather less rhetorical and more concrete and speak about concrete issues.

    And when we speak about concrete issues, my point of view is that we have reached the point in Russia nowadays exactly in this crisis, just today and tomorrow, when market mechanisms are simply not appropriate. It does not mean that we have to say something in favor of these mechanisms or against these mechanisms. They are not appropriate to this particular situation we are in now in Russia, because the financial system in Russia is in disintegration; it is in total disarray, so the money does not work as a real instrument. The banking system does not work, either. It is disintegrating. And relations between regions are broken or are disintegrating.
 Page 136       PREV PAGE       TOP OF DOC

    In this situation, it is very hard to imagine how the economy could react to traditional market incentives or market signals. It will not react or it will react in a very strange and unpredictable way.

    By the way, I should point to the fact that Sergei Kiriyenko, our former prime minister who is now very often blamed for the crisis which happened, and which I think is very wrong, because he inherited the mess from his predecessor, Mr. Chernomyrdin, so Mr. Kiriyenko, just a few days before he was sacked, he started preparing a list and that was reported in a conservative newspaper, Ruski Sidigraf, he was preparing a list of the big companies owned by the oligarchs to be renationalized, because in this situation for the government that was the only way to stop the mess, to stop the looting.

    And that is some kind of short-term measure and, in the long run, when we get out of this crisis, then we will have to discuss the theoretical issues like planning, free market economy, mixed economy, and so on. Thank you.

    Mr. SANDERS. Thank you both very, very much.

    Thank you, Mr. Chairman.

    Chairman BACHUS. Let me ask one final question. Can you give me a comment on Primakov, who has been nominated by Yeltsin as his new prime minister?

    Dr. KAGARLITSKY. Just tonight I still had some jet lag so I was not able to sleep so I turned on the television in the hotel and they were showing Mr. Primakov on CNN. That is how I have learned that my country now is going to have a new prime minister.
 Page 137       PREV PAGE       TOP OF DOC

    They immediately made, I think, two or three mistakes. The commentator immediately made two or three mistakes. First of all, he stressed the fact that Mr. Primakov was an old-time Soviet communist bureaucrat. Well, in a certain sense, every Soviet or post-Soviet Russian top bureaucrat was part of the communist system, as well as Yeltsin, as well as Chernomyrdin, as well as Mr. Kiriyenko, who was in the Komsomol bodies, and so on. So that does not characterize anyone in Russia.

    Also, by the way, they said there is good news that the ruble went up. I should tell you for many households in Russia that is bad news, because it means that they ran out of rubles and now they have to start selling dollars, which they have bought at a higher rate, so they will lose again.

    That just tells you that the quality of reporting on Russian events in this country is not necessarily very high.

    Mr. SANDERS. Nor for American events. Don't take it personally. It seems to be universal.

    Dr. KAGARLITSKY. I think that the important thing is not Primakov himself, because, first of all, it shows the weakness of the regime. It shows that Yeltsin has to retreat and we have to see who is going to be vice prime minister of the economy and who is going to be the new foreign minister, for example.

    Also, I think that Primakov is there for three, four, probably five months to manage the transition. So the important thing is not who is managing the transition but what will come out of the transition.
 Page 138       PREV PAGE       TOP OF DOC

    Chairman BACHUS. OK.

    Dr. ILLARIONOV. I did not hear any clear statement from Mr. Primakov about economic policy. I have heard a lot about his vision of foreign policy and it seems to me you are also very well aware about the position of Mr. Primakov toward neighboring states of the former Soviet Union, about Iraq, Iran, and other countries of the world.

    So that is why it is rather difficult just to make any forecast what kind of economic policy will be or can be implemented under Mr. Primakov's prime ministership.

    At the same time, from my point of view, all possible candidates, with very few exceptions, I don't think that Mr. Boris Fyodorov, who was currently acting deputy prime minister, would keep his job under Mr. Primakov. If he would lose his job and somebody like Mr. Maslyukov or some other people similar to Mr. Maslyukov will be appointed at this point, I think it is rather clear for me that this government will not be able to solve Russian economic problems and it will mean that the crisis, economic and financial crisis, will deepen, will be deepening. And it means that for at least one and a half or maybe two years Russia will be in a very deep and very serious financial, economic and political crisis.

    And in this case I don't think that Mr. Primakov will be, even if he will be appointed and even if he will be supported in the Duma, I don't think that this government will survive for a very long period of time.

    Chairman BACHUS. Thank you very much. We again appreciate your testimony and your appearance here. Thank you.
 Page 139       PREV PAGE       TOP OF DOC

    Mr. SANDERS. Mr. Chairman, I would just ask permission to place in the record a few articles.

    Chairman BACHUS. Without objection.

    We are now adjourned.

    [Whereupon, at 3:15 p.m., the hearing was adjourned.]