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U.S. House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.

    The committee met, pursuant to call, at 10 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.

    Present: Chairman Leach; Representatives Bachus, Metcalf, Kelly, Riley, Ryan, Ose, Biggert, Terry, LaFalce, Vento, Waters, Sanders, C. Maloney of New York, Bentsen, J. Maloney of Connecticut, Sherman, Goode, Inslee, Schakowsky and Moore.

    Chairman LEACH. The hearing will come to order.

    This is the third in a series of hearings on key issues in global finance. The purpose of our session today is to examine the state of the Russian economy and the United States policy toward Russian economic reform.

    We have before us several distinguished panels of witnesses today. We are extremely fortunate that the Honorable Curt Weldon, Chairman of the Duma-Congress Study Group and one of Congress' foremost authorities on Russia, has agreed to share his perspective on the state of U.S.-Russian relations.
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    I would also like to extend a warm welcome to Assistant Secretary Truman, who is making his maiden appearance—perhaps we should say baptism by fire—before the Banking Committee. For many years Ted worked closely with this committee as chief international economist at the Federal Reserve, and he brings a wealth of macroeconomic experience to his new position at Treasury. We also have a third panel of experts from the think-tank as well as the business community.

    As my colleagues know, in addition to Treasury, a witness from the Department of State had been scheduled to appear before the committee to explain how the U.S. bilateral foreign aid program for Russia complemented the activities of the international financial institutions in promoting democratic reforms. Inexplicably, however, the State Department withdrew its witness at the eleventh hour.

    I have a number of observations about the subject, but I think I will simply ask unanimous consent to put these personal perspectives in the record and ask at this point if Mr. LaFalce would like to make any opening comments.

    Mr. LAFALCE. Thank you very much, Mr. Chairman. I am very pleased that you are holding this hearing on international economic, financial, and national banking issues. I think this hearing is especially important for these two reasons: First, the vast array of problems facing Russia directly, which could affect its own stability; second, the fact that Russia's economic situation has been and will continue to be such an important factor in the global economic problems we have not yet overcome. Russia's economic situation could adversely impact the highly complex international geopolitical situation.
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    I also compliment the Chairman for the timeliness of this hearing. With the meeting of the G–7 heads of state and finance ministers next week in Cologne, Germany, it is vital for the Congress to be kept informed of all aspects of these delicate discussions.

    The last two years brought severe economic and financial problems in many parts of the world and the real prospect of global economic recession. Happily, we got past that situation with relatively little discomfort. But problems remain in many parts of the world; some countries not in difficulty previously are now showing signs of weakness, and the global problems have revealed faults in our international financial architecture.

    The economic, social, and political situation in Russia is especially bleak. After all of our efforts, as well as those of the multilateral banks, and some of those efforts may have been very misguided, Russia is still in a situation where it must borrow simply to service its debt. The Russians seem to have all but given up on the debts of the former Soviet Union. With Russia's incredibly small levels of foreign currency reserves and gold, and poor export prospects, it seems only a matter of time before they will again default. My only hope is that when this happens, other countries are not systemically affected as Brazil was last year. Moreover, I am worried that countries such as Germany, whose banks are the major lender to Russia and whose government has guaranteed most, if not all, of those loans to Russia, and whose economy itself appears to be in recession, are not further hurt by Russia's economic and financial difficulties.

    One particular concern I have is whether the considerable efforts of the U.S. Government and the multilateral banks were the best approach we could have achieved. We must consider whether we should continue on that same path, or make minor or even major changes in our approach. The great number of reports of corruption, diversion of funds by the Russian Central Bank, and other malfeasance raise questions about all assistance efforts. Certainly I will have questions on this issue for the members of the two panels today, and I regret very much that one of the panelists, I understand, Ambassador Taylor, could not be present today. Mr. Chairman, perhaps we should explore the possibility of requesting that the General Accounting Office review what has been done for Russia, both by the United States Government and the multilateral banks, so that they might offer an evaluation and critique.
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    Today's hearing is also particularly timely because on Tuesday our committee is going to hold a hearing on international debt relief. Initiatives on international debt relief, such as H.R. 1095, which Chairman Leach, Ms. Waters, Mr. Frank, Mr. Bereuter, Mr. Bachus and I introduced, are targeted for highly indebted, poor countries. As bleak as the situation is in Russia, it does not fall into the HIPC category. Yet, in many ways, Russia is receiving more debt relief than is acceptable for poor countries.

    I realize that the United States has a special interest in Russian economic recovery, social progress, and achieving political stability. However, if we truly are out of the global financial crisis, then now, more than ever, is the time for the United States to take the lead on international debt relief to the world's poorest countries as well. Moreover, one thing I have learned in my many years of advancing international debt relief truly applies to Russia, and that is although economic and financial conditions must be imposed on countries receiving debt relief from our Government and the multilateral banks, we must also include social and humanitarian conditions as at least equally important requirements for relief.

    With that, Mr. Chairman, I thank you.

    Chairman LEACH. Thank you very much.

    Does anyone else wish to make an opening statement?

    Yes, Mr. Bachus.

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    Mr. BACHUS. I thank the Chairman.

    Mr. Chairman, there is no question that Russia is still in a state of crisis. Reform in Russia has proven to be elusive. Almost a decade after the fall of communism, Russia's fragile democracy struggles to establish a viable free-market economy.

    I discussed this very issue with a young foreign exchange student from Russia recently. She had written a paper on Russia and its experiences since the fall of communism. I would like to introduce that paper into the record and also share a part of it with you today. It offers a unique insight from an intelligent young Russian high school student who is experiencing the travails of Russia's transition from communism to freedom.

    Her assessment of the progress, or lack thereof, may be enlightening to my colleagues. She draws an analogy between the Russian people ''coming out of communism'' and the children of Israel ''coming out of Egyptian slavery.'' She then points out that it took the Jewish people ''forty years to be free and understand their freedom.'' She is optimistic that it may not take the Russians that long. However, she emphasizes that the Russian people need time to adopt and conform to ideas radically different from those experienced under communism.

    Second, in view of the present situation in Russia, we should be careful not to discourage or disparage those in Russia struggling to maintain a fragile democracy. It is in the manifest interest of every peace-loving citizen of the Free World to fully support those in Russia who seek democracy and freedom. In that regard, Mr. Weldon, I would like to commend you personally for the work you have done with members of the Russian legislative body in establishing a warm and cooperative relationship. It is important that we extend that hand of cooperation and support.
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    In economic terms, it is also important that we extend a hand of cooperation and support, if helpful. However, there may be cases where well-intended attempts to intervene into the Russian experience may slow reform in Russia as opposed to speeding it. We have witnessed repeated failed attempts of industrialized nations and international financial organizations to intervene in a positive manner, and in some cases, to dictate reform. In certain cases, these attempts have the unforeseen consequence of enabling profiteers and the old guard to continue their corrupt ways.

    As we have learned in our own country, throwing money at a problem is not always the answer. In assessing the Russian economic crisis, we are faced with a dilemma. Russia has seemingly proven itself resistant to a viable free market and has fallen into an alarming degree of cronyism and corruption. Yet, at the same time, its future success is vital to our national interests. Russia cannot be written off without dire consequences.

    My written statement details the disheartening developments in Russia, and I now place that into the record.

    The Russian economy, June 1999, is not a pretty picture. On that point there is little disagreement. What is far more complex and subject to debate is the Free World's response to the challenges in Russia. The Free World finds itself at the proverbial fork in the road. We have two choices with respect to Russia: Keep trying or give up. If we give up trying, Russia will surely fail. If we keep trying and continue to support Russia in constructive ways, it could still fail. To keep putting forth an effort to help Russia, in my opinion, is our only option which has any opportunity for success.
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    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Bachus.

    Does anyone else wish to have an opening statement?

    Mr. SANDERS. Mr. Chairman, I want to applaud you for holding today's hearing, and I want to thank our guests for coming. I also want to echo Mr. Bachus' respect for Curt Weldon, who I think has done an excellent job in bringing our Congress closer to the Russian Duma. Mr. Chairman, I would hope that that is an area that we can pursue as well.

    Mr. Chairman, less than ten years ago, we in the United States watched with hope and admiration as the Russian people overthrew a repressive Communist dictatorship and established a democracy. But that hope is now more fragile than ever, and it has turned to deep despair for the vast majority of the people of Russia.

    Russia has fallen into economic chaos, threatening not only the economic well-being of Russia, but also democracy and peace in an important part of the world. The Russian economy declined by 40 percent between 1991 and 1996, and it continues to decline. The unemployment rate is over 12 percent, and inflation reached 84 percent last year. Three-quarters of the Russian people are barely surviving on incomes of $100 a month. Almost a third of the Russian people live below the poverty level. The Red Cross reports babies being fed powdered animal fodder because there is no baby food, and the average life expectancy of men in Russia has significantly declined.
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    The IMF and other international financial institutions have lent billions of taxpayers' dollars to Russia since 1992, but the primary result of the IMF's support has been to put the Russian government deeper and deeper into debt. It is facing $17.5 billion in debt payments due this year to foreign governments and commercial creditors. In fact, the Russian government must now get $4.5 billion in new credits from the IMF, just to avoid default on IMF loans due this year. This debt burden is almost impossible for the Russian government to meet its payments to workers, pensioners, contractors and soldiers, and it keeps the Russian economy on a continuing downward spiral.

    The result of the IMF's program in Russia has been economic collapse and financial default. We need to find a better way to address the economic crises in Russia and in other nations. We cannot afford these policies to continue that have helped bring us to the brink of disaster. The IMF's concept of structural adjustment, including steep interest rate hikes, deep cuts in public spending, wage cuts, exploitation of the environment, and repression of labor, has failed. It has promoted destructive competition among countries to attract short-term capital, and the result has been a catastrophic race to the bottom.

    We need an international response, Mr. Chairman. I would hope that this committee can keep the Congress from developing a national response. But it is a response that must help the ordinary people in those countries and the average worker of the United States of America. In fact, we are working—my office will be introducing legislation called a Global Sustainable Development Resolution, which approaches this from a very different point of view, I should say, than what we have seen from this Government in recent years. This legislation, one that I will be introducing, calls for the United States to negotiate with other nations to develop a sustainable development strategy, restructure the international financial system, ensure full employment, reverse the polarization of wealth and poverty, and protect the environment. I know those are very, very radical concepts. It includes an internationally coordinated tax on foreign currency transactions, international public investment funds for sustainable development, and international institutions to perform functions of monetary regulation that are now performed inadequately by national central banks.
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    It would condition U.S. funding for the IMF, the World Bank and other international financial institutions on the reorientation of their programs, from the imposition of austerity to support for labor rights—imagine that, support for workers around the world—environmental standards, and encouragement for small and medium-sized local enterprises, rather than large, multinational financial institutions. It calls for a binding code of conduct for transnational corporations, which includes regulation of labor, environmental, investment and social behavior, and it makes U.S. corporations liable in U.S. courts for harms caused abroad.

    It calls for the United States to work with other nations and organizations to forgive the debts of the poorest countries in the world and establish a permanent mechanism to adjust the debts of highly indebted nations. And, it calls for renegotiating the WTO, NAFTA and other agreements to make trade and investment work for just and sustainable economic development. In other words, the goal is not to make the rich richer, but to protect American workers and poor people throughout the world.

    Mr. Chairman, I look forward to having this hearing, and I look forward to hearing our guests' ideas about how we can do better.

    Chairman LEACH. Mr. Ryan.

    Mr. RYAN. Thank you, Mr. Chairman.

    Mr. Chairman, yesterday I read an editorial in the Investor's Business Daily that I thought was pretty intuitive. It discussed a country that ''tried to shed its communism in favor of a market-based system. It didn't take the necessary steps, though. Its leadership, mostly Communist holdovers, wouldn't trim the size of the state, fearing the loss of power. The IMF heaped more bad policies on top. It seized the country's economic policy in exchange for loans, and it pushed a series of shock measures aimed at speeding the reform.'' This country was not Russia described in the editorial, it was Yugoslavia before ethnic differences tore it apart.
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    Although Russia is a financial disaster, I believe the steady flow of international aid has actually impeded Russia's ability to conform to its true budgetary constraints and be forced into real economic reform. It was only when New Zealand faced the financial crisis of its own did its government take the needed reforms necessary to shrink its welfare state, privatize its state-owned enterprises, lower taxes and rethink its monetary policy. Of course, the IMF was not beating down the doors to offer them billions of dollars in loans to prop up their failing economy, like it has been doing with Russia.

    The money that does go in seems to flow right back out. Last year, nearly $5 billion of IMF aid to Russia disappeared in offshore accounts set up by Russia's own central bank. Private capital flows out of Russia at the rate of $1.5 billion a month. Money left in Russian banks disappears in frozen accounts with every financial tumble.

    The ruble today is worth, in dollars, about one-thousandth of what it was at the end of 1990. This depreciation has left many Russian banks effectively bankrupt, but the government still maintains their operation, because they are the backbone of Russia's completely inefficient economic system. Under communism, state-owned banks were the intermediaries for transferring funds from the government to enterprises and taxes from enterprises to governments. This is essentially how it still works today, except now the banks are owned by a select few, generally past party officials, who also own these former state-owned enterprises. Now the money flows from the government to the banks to favored firms, whether or not the firms actually produce a viable product.

    Likewise, the central bank is a product of Communist central planning. It has no history for conducting proper monetary policy, based on sound money.
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    Somebody is clearly benefiting in Russia from this system, but it certainly is not the average Russian citizen. The central bank in Russia has slapped so many restrictions on the ruble and enacted such strict currency controls that the ruble is virtually inconvertible. This further isolates Russia from the world economy.

    Foreign central banks must wait for years for a banking license, and they cannot open more than two branches in Russia today. And foreign banks are not allowed to buy Russian banks. The stability that comes from a diversified financial system in Russia right now is not legal in Russia.

    To be honest, I don't foresee any changes until we stop the free-for-all in foreign aid. This is not the voice of an isolationist, I am not an isolationist, but I am concerned that with our approach to Russia, we are actually doing more harm than good. I know that the current disbursement of IMF loans is contingent on bank reform, and it should be contingent on bank reform, but given Russia's past track record on implementing reforms, I have serious doubts that things will be different this time around. The money will probably flow back in, and it will go right back out.

    The most effective way to keep money in Russia to help the Russian citizens is to create an attractive investment climate with a stable currency, a convertible currency, and bank reform. Even basic banking transactions can't take place today. I have a hard time seeing how any official, either in the U.S. or in the IMF, seriously expects that the money they lend will lead to economic productivity. The homes must come first. I believe that the New Zealand example is a very fitting example, and that our aid to Russia must be rethought on a serious realm that stable money, stable currencies, real banking reforms are the preceding reform before we go add more damage to the situation. Thank you, Mr. Chairman.
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    Chairman LEACH.Thank you, Mr. Ryan.

    Does anyone else seek recognition?

    If not, we are delighted to hear from our colleague who has led a number of congressional and personal visits to Russia, and particularly the issues of the Duma, Curt Weldon.


    Dr. WELDON. Thank you, Mr. Chairman. Let me, first of all, thank you and my friend Mr. LaFalce for having this hearing. It is extremely important. I thank my colleagues for attending, and especially my colleague Mr. Bachus and Mr. Sanders for their very kind comments about our work.

    Mr. Chairman, I don't have a prepared statement; I want to speak from the heart today, so I will try to give you my perceptions on Russia and my relationship with Russia, and I will give you some concrete suggestions about future financing that we, in fact, I think should continue to provide, but under a very different scenario than in the past.

    My background with Russia goes back thirty years ago, Mr. Chairman, when I graduated with my Russian degree and first learned the language and studied the history, the culture, the educational system and the people of both the Soviet era and the Russian era. So my interest goes back a number of years. Since that graduation I have been to Russia approximately nineteen times, starting off as a young political leader interacting with the Konsomov, working in a bipartisan way with people like Don Fowler, traveling to Russia with people like Hadine Carter and people like Steny Hoyer, and a number of those on the Republican side like Pat Buchanan, forming an understanding of this country and its people based on personal relationships and personal experiences, not sitting back in an office someplace looking at forecasting figures or perhaps someone's policy guidelines.
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    I was there in 1990, Mr. Chairman, right before the reforms that were to take place in Russia during glasnost and perestroika. I was there to watch the faces of the Russian people as they eagerly awaited and anticipated the movement toward democracy. They had not been fooled by the Communists. As Ronald Reagan so well knew when he called the Soviet system ''the evil empire,'' 95 percent of the Russian people agreed with him, because they were not members of the Communist Party, the elite. They just couldn't wait until democracy and free markets arrived. They were promised a whole new way of life, a new opportunity, if you will, to share what we share in America, part of the dream of being able to own your own home, give your kids better than what you had, and share a part of a free society.

    Well, that reform came, and unfortunately, those promises were never realized for the Russian people. Sure, we pumped in a ton of money, Mr. Chairman, over the past eight years. We have given almost $1 billion a year of taxpayers' money to Russia. That includes cooperative threat reduction money; that includes economic development assistance through Commerce and the business program; it includes environmental cooperation; it includes military-to-military cooperation, nuclear, assistance with our waste problems. It includes the agricultural assistance we have given to Russia, $1 billion a year. Now, that doesn't include the IMF tranches that we have replenished on a regular basis.

    During the past eight years, Mr. Chairman, if you are a Russian father or a Russian mother, what have you seen be the result of that money coming into your country? You have seen inflation eat up the investments and the pensions of your babushka, your grandmother, to the point where they can't buy food. You have seen the economy turn sour. You have seen crime run rampant. You have seen those past leaders of a Communist oligarchy be given the controls to what were formerly state assets. You saw seven oligarchs be given the reins to the seven major banks in Russia who happen to be close friends of Boris Yeltsin.
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    Mr. Chairman, we failed Russia. We failed Russia because we were so enamored with having Boris Yeltsin succeed that we denied the reality of what was occurring in that country. We didn't call Yeltsin when we saw people being placed in positions of trust as the oligarchs of several of the banks who were no more fit to be bankers than I am. We failed to help Russia when we saw violations of proliferation, arms control agreements, that the Russian people knew were occurring.

    Mr. Chairman, we failed because we did not provide the sense of discipline and the sense of control that would allow Russia to evolve in a slow and careful way into a free-market system. Now we are paying the price for that, Mr. Chairman. The confidence of the Russian people and the Duma in America is at an all-time low. I understand why that is the case.

    Mr. Chairman, for eight years we kept putting money into Russia, both through the IMF and the $1 billion a year that we put in of taxpayers' money. What did the Russian people see happening? They didn't see their quality of life improving, and most of those programs I support in terms of our own allocation for cooperative threat reduction and other programs. But we didn't put into place the monitoring programs. We didn't hold Yeltsin accountable when those agencies misused those dollars. We didn't take the steps to provide the discipline that was necessary, and we supported Yeltsin when he ignored the Duma. For democracy to succeed, it has to have an engaged parliament.

    What did Yeltsin do for seven years? He trivialized the Duma. He called them rogues and thieves and bums, and some of them are, but there are many who are good and decent people, who want better for their country than what they had. We failed to reach out to those people, and it was the fault of both this Congress, but it was also the fault of this Administration. We were so enamored with our relationship between Boris Yeltsin and Bill Clinton that we failed to make a difference when Boris Yeltsin called the Duma a ''non-playing entity,'' when he threatened to disband them on a regular basis because he said they were not useful, when he bought off their votes to get what he wanted each year. Then, Mr. Chairman, when the economy turned sour, and when the IMF comes in and says, ''You have to enact tough discipline, you have to reform your tax code, you have to start collecting fees for services,'' Yeltsin and the IMF go to the Duma leadership and they say, ''You have to do the responsible thing.''
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    How could we ever expect the Duma to be responsible when, for seven or eight years, we have reinforced the policy that called them a bunch of thugs and thieves that were irrelevant in the democracy of Russia. How can we expect them to now make the tough decisions as politicians in calling for their constituents to pay for the housing and to pay for the electricity that they got for free under communism? There was no way the Duma would enact the reforms that the IMF and our State Department wanted, because we had not taken the steps to engage the other political components in Russia. We had not taken the steps to reach out to the regions. We were simply reinforcing a failed and corrupt system, and the Russian people are not stupid, Mr. Chairman. They saw through this, and they see through it today.

    Now, I am concerned, Mr. Chairman, because I think we can't abandon Russia at this critical time. I am concerned because Russia has over 20,000 nuclear warheads. They have the ability to cause a major world confrontation; they have the ability to proliferate technology as they have done around the world, and we need to be engaged with them. But it needs to be a different way. It needs to be based on strength, consistency and candor. You can't deny reality, because the Russians are too smart for that. They understand when we just basically turn our heads when things are happening that we know are wrong and we know are turning our heads. We need to deal with Russia as an equal partner, and we have not done that.

    Last year, Mr. Chairman, when our Congress did not have the votes to support President Clinton's request for the newest tranche in the IMF funding, I was dismayed. I have problems with the way Russia has handled the money, big problems, but I think in many cases we have caused those problems. I knew also, Mr. Chairman, that the Duma was not supportive of the IMF funding. Isn't that interesting? The Duma would not support it. You know why? Because they felt the West was simply reinforcing corrupt institutions that they were going to be held accountable for the dollars to repay with future generations, so they said publicly, ''We don't want any more money, because if you are going to give the money to Yeltsin's corrupt cronies, we don't want to be a part of that process; we are not going to be beholden to you anymore.''
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    So I arrived in Moscow the first week in September on the day that President Clinton was leaving, and I gathered a group of Duma deputies from all the factions, not just from the pro-Western factions like Noshdom and Yablokov, but I talked to people—Zhirinovsky from LDPR, and the Communists like Seleznev, the speaker, and people from the people's power faction, the agrarians and the regional faction—and I said, ''You know, you have to understand. For us to move in the direction you want, we have to work together as two parliaments. We have to show our governments that there is a different way to accomplish what all of us want, and we as parliamentarians can play that role if you are willing to make some tough decisions.''

    Mr. Chairman, I presented to the Russians an eight-point package, which you have in a handout that I gave you, which I call a Joint Statement of Principles Governing Western and International Foreign Assistance to Russia. This would include every dollar that we send into Russia. I just want to highlight these points briefly, because the Duma passed this document.

    Number one, establish a joint Russian-U.S. Legislative Oversight Commission to monitor Western resources going into Russia. Why is that so important, Mr. Chairman? Because the Duma has lost confidence in us. We have a GAO study that has just come out saying that much of our cooperative threat reduction money has been siphoned off by corrupt entities. It hasn't gotten down to the intended purpose. That was confirmed by the General Accounting Office. We have had the Russians themselves report on IMF money going down a black hole, ending up in Swiss bank accounts and U.S. real estate investments. Even the Russians have publicly acknowledged the problems with the central banks and some of the other oligarchs in Moscow.
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    We need to build confidence. I am not saying the parliaments should control where the money goes, because that is the prerogative of the administrations, but we should have a role in monitoring that the intended use of those dollars is actually what is occurring; that the money is getting down to where it is supposed to go. We can't do that today. We rely on the Yeltsin government to tell us it is happening. The Duma doesn't trust the Yeltsin government. Why should we? We need a joint legislative entity, whether it is this committee, international affairs, or some special bipartisan committee selected by the Speaker and the Minority Leader, that monitors every dime of Western money going into Russia. The Duma can get access on their side to see whether or not what we are being told is, in fact, truthful.

    Number two, we should require that Russian resources focus on programs like housing that will develop a Russian middle class.

    Mr. Chairman, there is no more important thing in my mind that we can accomplish than to help Russia create a middle class. Three years ago, Charles Taylor and I proposed to the Duma that we help them create a Western-style housing mortgage program. This is what the Russians proposed. The Communist speaker of the Russian Duma, whose picture is on the front of this, proposed a Western-style, American-style Fannie Mae/Freddie Mac that initially would be controlled by the U.S.

    I tried to get the Administration to get all NATO countries to participate in a joint effort to create a housing fund, to create a model for Russia. There were three different versions of this document produced. The Administration would never agree to the framework to establish this process that the Duma had agreed upon.
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    We are putting $15 million this year into a housing mortgage program in Russia controlled by the same banks that have corrupted every other program going into Russia. Mr. Chairman, we just haven't got it. We need to focus resources on programs like housing that get down to the people, that help create a middle class.

    Number three: We need to make Western resources available to reform-minded regional governments. Our policies have been focused only on Moscow and Yeltsin and his people. We need to recognize regional governors and Oblast leaders who are making reforms, who are privatizing land, who are reforming the tax collection system, to show that when they make the reforms that are important to us, we are going to reward them with model programs. We haven't done that, Mr. Chairman. We are only beginning to do that now because of intense pressure coming from both sides in both parties in this Congress, in the House and the Senate.

    Number four: Mr. Chairman, we need to deny, and I say deny, any financial assets to any corrupt institution in Moscow. We have identified those institutions who misused IMF funding. We know who they are. We should have a hard and fast rule that no future dollars go to those entities, and we should attempt to get reimbursed for those dollars wasted. The Russians are ecstatic over that idea, because they know where the dollars have gone, and they know the dollars that were intended to help the Russian people, the coal miners and farmers have ended up only in benefiting wealthy foreigners and wealthy Russian former communist leaders and wealthy Americans.

    The fifth recommendation, Mr. Chairman, comes from George Soros. I met with him in August before I went to Moscow, and I said, ''What would you do? What kinds of reforms would you think are important?'' He doesn't agree in government meddling, so he didn't necessarily want to do any of the things that I was espousing, except he said, ''Congressman, one thing you can call for is reform of the International Monetary Fund,'' and that is what the fifth recommendation calls for. It calls for the International Monetary Fund to establish an international commission that makes recommendations back to it to reform itself to be more in sync with emerging economies like the Russian economy. I happen to think that is a key priority that needs to be undertaken that we should constantly be stressing to the IMF.
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    Number six, Mr. Chairman, and this is unbelievable: The Russians agreed in the Duma from Seleznev to Zhirinovsky to put the horse in front of the cart that reforms must precede dollars. Now, the IMF couldn't get them to do that, Mr. Chairman, and neither could our State Department, and neither could the Administration. They could not get the Duma to agree to make the reforms that were necessary, but when you link that fact in with these other parameters, all of a sudden the Duma says, ''If this is going to be a part of this linkage to recognize regions, to bypass the corrupt institutions, then we are willing to make the tough calls. We are willing to tell our constituents that reforms have got to take place first.''

    Number seven was to develop a joint 90-day action plan where we would engage hundreds of CEOs of American companies in a direct mentoring relationship with the leaders of Russian institutions so that business leaders in America would have one leader in the Russian enterprise that they would work with on a daily basis, on an annual basis, solving the daily problems that business leaders are confronted with.

    The last recommendation, Mr. Chairman, was to bring over 15,000 Russian students to America within three years at the undergraduate and graduate level to have them attend American institutions of finance, economics, budgeting, and our free-market system, with the stipulation that those young Russian students must go back to Russia and live permanently. They could not apply for, nor could they stay in, America. We would, in effect, be creating a next generation of free-market leaders in Russia.

    Mr. Chairman, the Duma, you have a copy of the English version, passed not just the summary, but the entire document of these eight principles last fall. What did our Administration say? ''We don't need that. That is not important.'' And for that reason, Speaker Gingrich would not allow this item, or this package, to come before the House for a vote. Mr. Chairman, that is outrageous. We can't continue the policies of the past.
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    I have also included for you and the committee a statement that I frequently give in speeches around the country, I gave it at Harvard last year when I addressed the newest members of the Duma with Graham Allison, and this is a new vision for Russia, a vision that says, ''Yes, we want to be engaged; yes, we want to be your friend; yes, we want you as an equal partner; but we are not going to do it blindly, and we are not going to do it only through the eyes of your president. We want to engage the country in a constructive way, and if you accept the kinds of conditions that we have stated together are important for economic investment, then we will continue to invest in Russia.''

    Mr. Chairman, in closing, two years ago I was invited to Moscow by Seleznev to represent the United States, along with twelve other NATO countries—or European countries—and the question at the conference was, ''What has happened to not allow Western investment to go into Russia, and what can the Duma do to encourage more Western investment?'' I listened to the other countries of the world give their positions. Most of them were ministerial level representatives. And I had alongside of me the representatives of our American Chamber of Commerce in Moscow and the Russian and American Business Council, two outstanding groups to represent our business interests in Russia. They gave me some interesting statistics, Mr. Chairman, that we need to understand.

    From 1991 until that conference, American businesses invested $10 billion in the Russian economy. During that same period of time, those same American businesses invested $350 billion in the Chinese economy. What kind of signal do we send where our country throws off communism after 70 years, and we invest at the $10 billion level as a reward for moving toward free markets, when a communist dictatorship, because of perhaps the tightness of its control, enjoys a $350 billion investment from American companies during this same period of time? Something is fundamentally and drastically wrong with what we have done, Mr. Chairman, and this committee can help lead us into a new direction.
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    I thank you for your time.

    Chairman LEACH. Thank you very much, Curt, for a very thoughtful statement. We appreciate it very much.

    Our second witness is the Honorable Edwin Truman, representing the United States Department of the Treasury. Mr. Secretary, you are welcome. Please proceed as you see fit.


    Mr. TRUMAN. Thank you very much, Mr. Chairman. I thank you for your gracious welcome.

    Thank you, Mr. LaFalce and other Members of the committee. I am grateful for this opportunity to discuss recent economic and financial developments in Russia, which I know are of considerable interest to this committee as well as to other Members of the Congress.

    There is no question that the United States has enormous economic and national security interests in what happens in Russia. Economic instability in Russia raises important concerns for our broader national security, given Russia's pivotal and continuing role with respect to nuclear security, the battle against terrorism, the stability of Eurasia, and conflict resolution in global hot spots like the Balkans.
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    As your initial comments have indicated, Mr. Chairman, the economic situation in Russia remains very challenging and difficult. It is not quite still in the crisis phase, but to use the phrase, it is not a pretty picture, and I think we can stipulate all that.

    In my testimony today, I would like to structure my comments around seven points. The first one is maybe a bit more positive than you all would like, but let me start there. A certain amount of optimism sometimes is useful. Russia can point to some reform accomplishments, both political and economic, during the past eight years, and they remain in place. Second, events since August suggest that there is a greater consensus in Russia on economic objectives than we might reasonably have anticipated. Third, although all the news over the past eight years and the last ten months about economic reform in Russia has not been uniformly negative, the plain fact is that Russia continues to suffer from an inability to implement a consistent, comprehensive and sustained economic reform agenda. Fourth, criticisms of the West's efforts to help Russia based on the results achieved and the corruption that remains tend to confuse the medicine with the disease. Fifth, looking ahead, the approach that best serves United States' and Russian interests is to continue to support a credible extension of market-oriented economic reform. Sixth, a resolution of Russia's external debt situation is intimately bound up with the issue of Russia's cooperation with the international financial institutions on an agreed program of economic reform. Seventh, and last, in light of past shortfalls relative to expectations, Russia and the international community should try to develop new, innovative ways to promote Russia's transformation to a fully functioning market economy, including through support of broad-based, structural and institutional reforms.

    Turning to my first point, although many observers, with reason, are disappointed in the amount of progress that has been made in Russia's economic transformation, we should not lose sight of what has been accomplished over the past eight years, accomplishments that generally remain in place. Russia has a free press, voters select their political representatives via the ballot box, Russians trade freely in both goods and information with the rest of the world, and private property and free enterprise are generally accepted elements of the economic landscape. Well over half of the economic activity is now in private hands. By 1997, military spending had fallen in real terms to one-seventh of its peak Soviet level, which was in 1988, and two-fifths of its level in 1992, and the central bank has demonstrated that it has the technical capacity to bring inflation under control.
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    Second, it is easy to be discouraged about the Russian economic reform and performance because there is a lot to be discouraged about. However, developments since last August suggest more of a consensus in Russia on the fundamental economic objectives than might have been anticipated or feared. Even during a period in which many of the leaders of the government were identified with the failed policies and structures of the Soviet past, there has not been a reversion to central planning, directed lending, industrial subsidies, or reliance on the printing press. Given this experience, it is a reasonable judgment that the probability of such retrogression in the immediate future has been reduced. Moreover, going forward, the continued presence in the new government of reformist elements is reassuring, and the commitment by the current and previous governments to reforms agreed with the International Monetary Fund and the World Bank appears to demonstrate that support for core economic and financial reforms is more firmly entrenched in Russia than some may have thought was the case.

    Nevertheless, and this is my third point, the root problem in Russian economic reform since the dissolution of the Soviet Union has been the inability to translate promising intentions with respect to reform into reasonable reality. This problem unfortunately remains today, and it has been stressed in previous testimony by Administration officials. A bloated bureaucracy, an unwieldy and distorted tax system, and a failure to implement fundamental fiscal reforms led to a buildup of debt which overwhelmed the authorities in August of last year. The Russian banking sector never developed into an effective mechanism for allocating savings to productive private investment. It follows from these shortcomings that the Russian government's capacity to implement fundamental fiscal and structural reforms will be a core consideration in assessing both the likely trajectory of Russian policies going forward and the appropriate level of support for those policies by the international community.
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    With respect to U.S. economic and financial policies toward Russia in the aftermath of the August crisis, critics of Russia's reform process have focused their critiques on two aspects. First, they have argued that Russia's default and devaluation last August demonstrate that the macroeconomic prescriptions of the IMF, prescriptions supported by the United States and other G–7 governments, were flawed. Second, they have argued that Russia is simply too corrupt to reform.

    The first criticism is the equivalent of concluding that the medicine is ineffective when the patient has not taken it or has only intermittently taken half of the recommended dosage. My sense is that there was and is quite a broad consensus, both in Russia and in the West, regarding the benefits of macroeconomic stabilization in terms of building confidence, facilitating long-term planning and investment, and providing the basis for economic growth. Having said this, it is also broadly understood that a robust fiscal framework was never put in place to support the stabilization that was first achieved in Russia in 1995. Without a sustainable financial structure for the public sector, backed by credible budget processes, it was only a matter of time until the effects on government debt of the compounding of high interest rates would cause the macroeconomic stabilization that had been achieved to crater. However, it was not possible to predict when that failure, the failure to fully reform Russia's budget and tax system, would be manifested in the market. Moreover, the severe setback to stabilization, which ultimately resulted, in no way detracts from the fundamental desirability of the course that was persistently advocated, but not consistently pursued, from 1995 on. There was always a reasonable chance that the race between the forces of fiscal reform and the arithmetic of fiscal excess would be won by the former.

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    The second criticism of policy toward Russia, the issue of corruption, assumes, incorrectly in my view, that the causal arrow between corruption and reform points in only one direction. In fact, one of the core goals of a balanced program of economic reform in Russia is the elimination of opportunities for corruption which proliferate in a system that is ruled by arbitrary administrative controls and administered by underpaid bureaucrats. From this perspective, the disturbing persistence of widespread corruption is indicative of just how far Russia has to go and of the inadequacy of progress over the past eight years.

    Corruption in Russia is a very serious issue, not only for Russia, but also for the international community that is trying to be supportive of Russian reform. For this reason, the issues of crime and corruption have received increased attention in recent years, much of it linked in one way or another to our efforts. We in the United States have been working with the Russians for several years now to combat organized and other types of crime. U.S. Government programs have focused on the development of the rule of law, law enforcement training, building working relationships between U.S. and Russian law enforcement counterparts to enhance cooperation on specific criminal cases, and the negotiation of core law enforcement agreements to enhance overall coordination of anticrime efforts on the basis of internationally accepted standards. We have also pursued and supported anticorruption efforts by helping to promote good governance and transparency. At the Department of Treasury's's Financial Crimes Enforcement Network, we are working with the Russian authorities to assist in the development of money laundering legislation and the creation of a financial intelligence unit for the surveillance of large-scale financial transactions.

    There are some early indications that all of this work is beginning to bear fruit. Notably, the Office of the Prosecutor General has initiated and is prosecuting numerous cases against Russian officials, including high-level officials, who have allegedly abused their government positions. Russia is also beginning to pass much-needed legislation, including civil and criminal codes, which will help to form the basis for a ''rule of law'' society. Perhaps most importantly, there are signs of greater recognition at the political level of the negative consequences which unchecked crime and corruption can have on the development of democracy and sustainable economic growth. However, I do not want to understate either the seriousness of the corruption issue in Russia or the difficulty of dealing with such phenomena once they are entrenched. We will continue to support programs that help Russia combat corruption.
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    Looking forward and moving on to my fifth point, we believe that the approach that best serves Russia's interests, as well as those of the United States, involves principally a renewed commitment by Russia to the market-oriented process of reform. The scope of U.S. and international assistance should be predicated on the quality of the efforts of the Russian authorities and the support they receive from the general population.

    The strategic importance of Russia dictates continued engagement, but a process of engagement that is predicated on performance, not just promises. We intend to continue to stand ready to engage Russia across a broad spectrum of pursuits and to remain alert to new opportunities to reinforce economic and financial reforms. We also intend to continue our long-standing support for the international financial institutions' objectives in Russia, with program objectives appropriately gauged to current conditions as well as conditioned on Russia's adherence to its program of reform.

    Because of past failures, Russia now faces serious external financial challenges. The issue of Russia's external debt problem, in turn, is intimately bound up with the issue of cooperation with the Fund for three key reasons.

    First, avoiding additional borrowing or printing money to finance budget deficits requires the type of fiscal and monetary discipline and the close technical attention to detail and consistency that a Fund program can engender.

    Second, Russia will need external financing to help cover a substantial financing gap over the program period.
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    Third, Paris Club creditors will not proceed to negotiate about Russia's debt situation without an IMF-approved economic program in place. Such a program helps provide confidence that Russia is implementing the policy steps needed to establish a sustainable external financial position.

    The program that the Russian authorities have agreed with the IMF focuses on areas such as fiscal reform and strengthening the banking system that we believe are key to restoring stability to the economy, the Paris Club, assuming Russia has put in place the new IMF-supported program, can help provide needed breathing space regarding Russia's external payment obligations. We hope to avoid a counterproductive outcome where an impossibly large external debt burden reduces incentives for Russia to remain engaged and to continue the process of economic reform.

    At the same time, we must be realistic about what Russian policy can achieve under current political circumstances. We must also be cautious about adding further to Russia's debt burden. We must ensure that any funds advanced by the IMF are dedicated to the repayment of obligations to it. Similarly, any funds advanced by the World Bank or the EBRD should be targeted to the achievement of well-specified reform objectives.

    On my final point, we must recognize that Russia continues to face very difficult economic challenges, and it is handicapped by its limited accomplishments to date. Against this background, Russia and the international financial community should try to develop new, innovative ways to promote on a broader basis the transformation of Russia to a fully functioning market democracy using mechanisms that reflect the lessons of recent years. Once a new economic program supported by the IMF is in place, and pressure on Russia's external financial position has abated, the focus should be on helping Russia craft a comprehensive reform strategy that will be politically salable to a broad spectrum of Russian citizens.
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    In our view, emphasis should be on the following items: Lower tax rates with more uniform application, including increased pressure on tax-delinquent enterprises; comprehensive bank restructuring; increasing the flow of financing to small- and medium-sized enterprises; improving the investment climate by enhancing the rule of law: reducing the regulatory burdens and strengthening the rights of minority shareholders; redirection of expenditure priorities toward health and education; reductions in redundant bureaucracy and in arrears to teachers and health service workers; and increased attention to Russia's regions, with extra emphasis and support directed to those regions that display a willingness to embrace more aggressive reforms.

    Greater emphasis should also be placed on our dialogue with Russia on issues of political legitimacy and on the development and implementation of a robust social contract.

    Finally, more attention should be paid in the coming months to an intensification of the dialogue between the International Monetary Fund and the World Bank on structural reforms so that progress on structural issues advances in tandem with achievements with respect to fiscal and other macroeconomic stabilization goals.

    This agenda is challenging. There is no assurance that it can be implemented, but, in my view, it is the way forward. However, it is up to Russia to choose this course.

    Mr. Chairman, I hope these points have been helpful, and I stand ready to try to answer any questions from you and this distinguished committee.
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    Chairman LEACH. Well, thank you, Mr. Secretary. I will tell you how appreciative I am of that very succinct summary from the Administration's perspective.

    As we look at Russia, all committees of the Congress have certain areas of specialized expertise. This committee has oversight responsibility over the international financial institutions, so that is of significance to us, and Treasury has administrative ties to our representation to them. Second, we have certain macroeconomic oversight responsibilities. And thirdly, we are a committee that deals more than others with the financial infrastructure kinds of issues.

    From this perspective, it strikes me that there are a number of areas that ought to be pursued more succinctly. For instance, you have pointed out in your testimony that the financial infrastructure has failed. Well, if you have a financial infrastructure that doesn't work, it is pretty hard to view a country that can organize savings for itself, and that is one of the reasons that Russia suffers from exactly what Latin America did a couple of decades ago, and that is capital flight. So for all of the resources the West is providing, they appear to be recycled and actually less in some years than the Russians are actually sending out of the country, which is a prescription for an economy that reduces rather than grows.

    So one of the great questions that I think should be at the forefront of both the international financial institutions and the United States Treasury, is how do you strengthen another country's financial information resource capacity? You are, coming from the Fed, an expert in this area, and I would like to ask your advice in this regard.

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    Mr. TRUMAN. Well, I agree very much with your diagnosis, Mr. Chairman. I think the first problem that we have in Russia is that they have a failed financial structure, and it is a failed financial structure that never actually was functioning. So they have in that sense two strikes against them, and the effort going forward is to try to reform that structure and put in place the kind of mechanisms that give depositors confidence so that, as you say, they can keep their money in the country rather than taking it out of the country.

    The building of a sound financial structure is a complex matter. It starts with the legal framework, but it also involves, very importantly, the behavior of the institutions themselves. There had been a number of efforts over the years. The president of the New York Federal Reserve Bank spent a lot of time and effort earlier this decade in trying to build in Russia a cadre of bankers who behaved like bankers, and although that effort was not overwhelmingly successful, it, I think, has had some positive results.

    I think the challenge now is to try to consolidate what one has in Russia. There are some financial institutions that are functioning better than others, and the challenge is to leave those standing and to build a financial structure around them which is based upon clear administrative legal structures and a code of banking behavior that is consistent with the kind of market-oriented economy that we want to have when the Russians need it.

    Chairman LEACH. Let me just add several quick questions that maybe you can respond to.

    One of the things that appears to have occurred is that very large banks have been established that have become very unaccountable to people. So one of the questions is should there be an emphasis on the smaller banks, should there be an emphasis on credit unions?; and then on the secondary level, one of the points that Congressman Weldon made that a lot of us have followed in this country, the activities of our GSE structure, particularly Fannie and Freddie. And as much as I have some doubts about everything they do in this country, I think they are a pretty extraordinary model for some developing world situations.
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    So at a secondary market level, do you think the United States and the international financial institutions ought to be attempting to create and implement the development of a GSE kind of structure for housing in particular?

    Mr. TRUMAN. On your first point, it seems there should be greater emphasis on smaller institutions, and especially smaller institutions that lend to small- and medium-sized enterprises as very useful environment. Some of the work that has been done by the EBRD in particular and others in Russia has tried to emphasize that approach, and I think it is our view that going forward it is useful to try to promote more of that.

    I hadn't thought about the question about GSEs. It is a complicated issue, as you and your colleagues have pointed out. On the one hand, you are trying to set up a system in which government gets out of running the economy. On the other hand, you have a situation in which the infrastructure of secondary markets doesn't exist. I see some tension between those two objectives. So I suppose the answer would be, if you are going to do it, do it very carefully, so that you can strike the right balance between the former world of government-directed lending and a world in which you are trying to support market mechanisms that help to allocate capital.

    Chairman LEACH. Mr. LaFalce.

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

    Mr. Truman, this is an extremely difficult issue. Let's try to go back ten years or so when the Berlin Wall fell and we then were faced with the prospect of many formerly centrally-planned economies going through a transition to some mixture or some pure form of market economy.
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    As we look back, are there any countries that we can point to and say they pretty much did it right, or we helped them—right? How does that compare with Russia, and what would be the crucial differences?

    Mr. TRUMAN. I think if you ask 100 people, you get 100 answers to that question; if you give 100 comments, you would probably get at least 200 answers.

    There, I think, is no one way. I think the country that currently attracts the most attention is Poland in terms of its success. And there, you know, approximately ten years ago they implemented a very successful shock program. The first several years after that were quite rough, but over the last——

    Mr. LAFALCE. Who was their chief advisor?

    Mr. TRUMAN. Jeffrey Sachs was very much involved in that.

    Mr. LAFALCE. He was advocating the very same type of shock therapy in Russia. He was advising both countries at the time, as I recall.

    Mr. TRUMAN. Yes, the two countries started out in very much the same way. They freed prices very quickly, and they tried to bring about a lot of change very quickly. I think for a variety of reasons, it worked better in Poland than it did in Russia, partly because in Russia other supporting elements were not put in place quickly. In particular, the macroeconomic situation was not put in place in Russia, so the budget was not brought into balance, and the printing press was not stopped. So after the initial shock of price adjustments that took place in Russia and in Poland, in Poland the inflation rate came down, and in Russia it spiraled close to approximately hyperinflation.
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    But I think probably the difference is more than that, because there are two important differences between Poland and Russia. One is that Poland was a country that had an experienced market economy prior to World War II, and Russia had not. Second, Poland actually had been going through a process under the Communist leadership of economic reform through much of the 1980's. One consequence of that was that there was much more ownership of the reform process. When the time came to put in place this shock therapy, there was a much better understanding of what was going on.

    Mr. LAFALCE. Much more ownership of what?

    Mr. TRUMAN. Ownership of the program. That is a code word that we use to suggest that the body politic embraced more openly the process of reform and understood what was going on there.

    Mr. LAFALCE. Was there a profound difference in the nature of the kind of privatizations that took place in Poland as opposed to the kind of privatizations that took place in Russia? This has been a pet peeve of mine.

    Mr. TRUMAN. I am not an expert on privatization. My sense is that the textbook on how best to privatize an economy has not yet been written. There were differences between Russia and Poland. Russia initially didn't do very much, and then it got going more rapidly. Poland in some respects went very fast and in some respects went quite slowly.

    Mr. LAFALCE. You see, one of the problems I had, which is, we were much too interested in whether we were going fast or slow, and I don't know that that was all that important. I think what was most important is how well, and it seemed to me that the international financial institutions and the Treasury and everybody involved was interested in the efficiency of privatization as opposed to the equity of privatization. It seems to me you had to be interested in both, in disbursing the wealth of society through the privatization process, rather than consolidating the wealth of society through that privatization process.
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    Mr. TRUMAN. I agree. I think equitable privatization is important. It is a very difficult challenge to do it right, and it has to be done in a way which is broadly supported by the country. Many of the mechanisms that have been tried in various countries tried to achieve privatization through systems in which one of the motivations was to bring citizens in general into the privatization process. In some cases that has been more successful than in others. I think that is what I want to say.

    Mr. LAFALCE. That is important, especially if you give them a stake.

    Mr. TRUMAN. The problem is that if you give them a stake, and they don't really take it seriously, are they still better off than they would be if they had a more indirect stake?

    Privatization is very important. It is important to do it right. And no doubt, mistakes were made.

    Mr. LAFALCE. This was crucial, because this is something where you get one chance, and once you privatize, then you have either done it right, or you have done it wrong. Now, you haven't done all the privatizations that are required, so you have chances with respect to future privatizations, but, boy, if you move very, very fast, and you do it wrong, you have really created problems for yourself.

    One other question, if I may. Why should the IMF be giving additional monies in order to service debt to the IMF? What are we doing?
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    Mr. TRUMAN. Well, we insist that the IMF be repaid.

    Mr. LAFALCE. So the IMF will give money so that they can be repaid.

    Mr. TRUMAN. That is the arithmetic of the operation, but let me step back a minute. The Russian program actually went off-course ten months ago. Russia has been repaying the Fund during that period, and it has continued to repay the Fund. That, I think, is very important. A new program with Russia is not yet in place. It has been designed and measures are being approved by the Duma and put in place by the government. So it is fair to say that the money that will be disbursed by the Fund, assuming that the program is put in place and then implemented, will effectively go to repay the Fund. In the meanwhile, Russia has been repaying the Fund.

    So there is the same traditional linkage between the new IMF program and economic reform and stabilization programs. It so happens that the amount of financing that is being put forward in the new program, approximately $4.5 billion, will be less than the projected repayments to the Fund over the program period, roughly $6 billion. So there will actually be a net repayment to the Fund over this period.

    Mr. LAFALCE. Let me ask you one last question. I am concerned about economic stagnation in Europe, and the largest economic engine in Europe is Germany's, and the German banks, as I understand it, are the most exposed to Russia. They seem sanguine about that because of the fact that their sovereign debt is guaranteed by Germany, either in large part or totally by the government, but yet that leaves the government holding the bag. What are the repercussions for the economy within Germany of this, and, therefore, the economy of Europe? And what is the capacity of the German government to deal with this, given the fact that they have to operate now within the strictures and guidelines of the European Union, both with respect to interest rates and monetary policy?
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    Mr. TRUMAN. I think you put your finger on what is a very complicated issue: the German mixture of finance and economics and politics. Clearly, the German government's view of the Russian situation is colored by the fact that they have a direct economic and financial stake in the Russian economy. That leads them, in the short run, to be supportive of the right kinds of macropolicies so that Russia is better able to service its obligations, and those policies are, broadly speaking, also in the interests of Russia. So I think there is a broad consistency here. It is fair to say that if things deteriorate dramatically, then that will have implications for the German budget, and, therefore, depending on how it is treated, on the German economy. Thank you very much.

    Chairman LEACH. Thank you.

    Mr. Bachus.

    Mr. BACHUS. Thank you.

    We have discussed a lot of things that don't work. I want to discuss something that, Curt, you mentioned that I think would work, and that is this exchange program. I didn't know that that was one of your proposals; yet I was able to understand, I think, more about Russia when I read what Anastasia Kardova, this high school exchange student from Russia, when she wrote this paper, came to my office and handed it to me. She kind of put it down, I think, where we can all understand it, and this is a high school girl from Russia, when she said, ''Two countries, Russia and America, are the biggest in the world, and I want them to be big friends, too. I also want a Russian-American union to try to make the whole world better. For me, a girl from Russia, America has become my second home.''
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    You know, you talk about doing some meaningful things to bring Russia into a free-market economy, to make them appreciate democracy. She talks about the fact that a lot of people, older generations, they don't understand a free-market economy, they don't want it, they have been used to being dependent, told what to do, and it is a way of life. It is something they really don't want to change.

    She came under the Freedom Support Act, which is actually a program we now have, and the exchange program.

    Curt, you have talked about this program to enroll 15,000 Russian students, bring them to American colleges and universities. I think from an economic standpoint, the Treasury Department, I think that is a wonderful way to long-term begin to change that mindset in Russia. You know, the Peace Corps, a lot of people don't understand the Peace Corps, but I believe the Peace Corps has made significant contributions around the world.

    I would like your comments on that, Curt. I notice the Russian Duma, this was one of their eight points that they are advocating.

    Dr. WELDON. Before we have to go vote, there are a lot of things happening. I just got the Pew Foundation to fund a staff exchange where you will be able to send your staffer to Moscow to work in the Duma for the period of a week or two, and we are bringing Duma staffers over to our offices. This is already being funded. That will be operational as soon as the Russians lift the sanctions on our relationship because of Kosovo. Ted Stevens put $10 million in a supplemental that is funding the bringing over of thousands of young Russians who are going to be future leaders in their country. That program is now being developed by Jim Billington of the Library of Congress. There are other initiatives. One is involving a linkage of 450 cities with 450 mayors in our country. So what you are saying, Mr. Bachus, I agree with totally.
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    Imagine if we had just taken 1 percent of the billions of dollars that has gone down the black hole in Russia that we can't account for. Let me tell you, I am not a banker, but I couldn't do any worse than what we have done. We have taken $20 billion, and where are they? We don't know. $300 million for the Russian coal miners, where is that money? We don't know. Money for the farmers, where is it? We don't know. We built a lot of nice lodges, a lot of nice places at the beaches. We could not do any worse than what has been done in the past eight years, even if they gave each Member of Congress a couple of hundred million dollars to go out and flow around. That is what infuriates me so much.

    We have to change the way we are doing things. Right now, this Administration is funding a mortgage program, instead of doing it the way this bipartisan leadership in Congress has asked for, which is a structured format that has said they will come in and back up, we are going to do it through an existing institution at interest rates that Russians can't afford on terms that Russians can't live with. People in the Administration will say the Russians can't afford to fund a mortgage.

    Charles Taylor, who is one of the most successful bankers in America, is giving mortgages to Russian people today. I was with him on a trip last year when a Russian drove five years to pay his mortgage payments a year in advance with no guarantees. If Charles Taylor's bank in North Carolina can give unsecured mortgages in Russia successfully, then doggone it, we ought to be able to do that. We certainly could not do any worse than with the IMF money we have to date.

    Thank you, Mr. Chairman. I have to go vote.
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    Chairman LEACH. The hearing will be in recess pending the vote. Mr. Bachus, you have an extra minute at that time if you wish to use it. The hearing is in recess.


    Chairman LEACH. The hearing will come back to order.

    Ms. Waters.

    Ms. WATERS. Thank you very much, Mr. Chairman. I tried to arrange my schedule to spend some time in this hearing today despite some conflicts of interest that I am going to have to leave, but I wanted very much to hear this discussion about Russia and its economy and what is going on. And even though it is not our concern to be involved with the question of immigration and the export of basically criminals from Russia, I think it is something that we have to pay attention to as we develop our policy in relationship to Russia.

    I am concerned about the growing reports of crime that are being identified with Russian immigrants, not only in the Caribbean, but in this country, and I would like a report. I would like to know more about these growing reports that I am hearing about Russia and its involvement both on Wall Street and in other areas of crime. I think we—it is something that obviously it is known in our intelligence community and it is known about in our police departments and I think this legislature, this Congress rather, should know more about it and I think we should understand it in relationship to policy that we are developing about Russia. And it may cause us to want to pay attention to our immigration laws and see what we can do to stem what appears to be a growing presence of crime that is emanating from Russia.
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    Second, I want to understand our generosity to Russia in relationship to debt relief and IMF and the World Bank. As you know, some of us, including you, Mr. Chairman, are involved in the question of debt relief and we are all supportive of the tremendous legislation that you are bringing forth on debt relief for countries around the world. We are all very concerned about structural adjustment and the problems that are being created by the IMF to many countries as they squeeze these countries for repayment of debt.

    At the same time, we see this generosity toward Russia. I know that we have some strategic interests in other kinds of things, but as we sit here and we see the flexibility of the IMF and the World Bank after we have been literally stonewalled by them, it doesn't make us too happy. We see that we have Russia on the one hand that still provides large subsidies in several sectors of their economy. We see that they don't repay the debt and we see that nothing substantial is happening, but we are being even more generous to them.

    Now, I don't know what policymakers such as myself should be expected to do. With all due respect to Curt Weldon, I am sorry he is not back here, and all of his programs for Russia making sure that he develops a Russian middle class and that we have 15,000 students here and that they have access to health care, I am still fighting for that for constituents in my district. So with all of this information that we have about the inability of them to deal with their economy and the inability to repay their debt, the generosity to them by IMF and World Bank, what is expected of us and this hearing? What is it we have been asked to consider?

    Perhaps I need you to help me to understand what we are looking at here with Russia and how we are supposed to interpret IMF and World Bank, particularly in relationship to Russia. What have we been asked to do, if anything?
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    Mr. TRUMAN. Is the question directed at me, Mr. Chairman?

    Chairman LEACH. Yes, sir.

    Mr. TRUMAN. On your first question about crime and Russian immigration, obviously that is not my department if I can put it that way. Primarily, though, many of the efforts that I described in my testimony where we are trying to work on the general issue of crime and corruption in Russia do intersect with those concerns. We at the Treasury and other parts of the U.S. Government are trying to cooperate with the Russian authorities in ways which allow—especially in the financial crimes area—us to better track and monitor the situation so that we can deal with crime and corruption better.

    On the question of the Fund and the Bank and their generosity, I am not sure that that is the word that the Russian authorities would use. The standards the Fund applies to programs, whether they are with Russia or Korea or Indonesia or Brazil or Belize, are essentially the same in that they are looking for the same kinds of macroeconomic and structural reforms in these countries as they are in other countries, with programs tailored to the circumstances of the particular country at the time.

    The debt relief that is associated with the Russian program is not the kind of debt relief that you are concerned about in terms of the HIPC. This is a question of qualifying Russia for rescheduling of existing debts, not a question of reducing the outstanding debts of Russia. So it is of a different character than the debt relief associated with the HIPC countries.
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    Ms. WATERS. Well, you know, you just said a lot, but you have said nothing. First of all, let's start with the crime problem. You kind of alluded to, ''Well, we don't have anything to do with that, but we kind of track it, so that we can track it.'' So what are you tracking for and what have you done and what have you found out?

    Mr. TRUMAN. I think it would be best if you would permit me to prepare an answer for the record on that question. This is beyond my level of competence. I would be glad to prepare an answer for you for the record on what the Treasury Department has done in this area with respect to financial crimes involving Russian nationals and their cooperation with the Russian authorities.

    Ms. WATERS. That is fair enough. Let's talk about debt relief. You talk about it being different from HIPC. You talk about it in terms of restructuring; is that right? So what is the difference? What have we been asking for? Can you talk about debt relief in relationship to Africa? Can you compare Russian debt relief with African debt relief?

    Mr. TRUMAN. In the case of the African countries who have qualified for HIPC, as you know that debt relief program is for highly indebted poor countries. There you are talking about reducing the level of their existing debts to bilateral creditors like our Export-Import Bank and multilateral creditors like the multilateral development banks and the Fund. So that program is one where you actually are writing down the debt. You are saying ''You owe us $100 million and we are going to write that down to $25 million over a period of time.''

    Ms. WATERS. That is debt relief?
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    Mr. TRUMAN. There is a semantic problem. Some people call everything debt relief.

    Ms. WATERS. That is OK. What we are talking about is lessening the burden of countries to repay. That is debt relief in its purest form no matter how you do it.

    Mr. TRUMAN. That is right. Restructuring is a form of debt relief, but it is not the same relief as that involved in the HIPC program, because in restructuring you are not writing down the debt, you are just postponing the repayment of the debt. So it is a milder form, or a less generous form, to use your word, of debt relief.

    Ms. WATERS. That is why I used the word generosity.

    Mr. TRUMAN. You owe us a $100 million this year. In the case of forgiveness, we will say you don't have to pay us, or you only have to pay us $20 million. In the case of restructuring, we are going to postpone that debt to be paid in the year 2001 to 2010, but we are not going to eliminate the debt entirely. For the HIPC countries we are talking about debt relief in the form of actually writing down the debt, forgiveness. That is the distinction I was trying to draw.

    Ms. WATERS. I refer to it as being more generous to Russia.

    Mr. TRUMAN. On the debt side it would be less generous, because I think we would agree that rather than eliminating a debt, rescheduling a debt leaves the same amount of debt.
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    Ms. WATERS. That is what I hear. Let's take a look at the Russian economy. June 1990-September 1, 1998, Russia owed the IMF $14.1 billion, SDRs about $19.5 billion, making it the Fund's largest debtor.

    Mr. TRUMAN. Right.

    Ms. WATERS. Can you discuss the amount of the debt in relationship to the African countries? When they say largest, how much more generous is it in terms of extending?

    Mr. TRUMAN. The ''largest debtor,'' that particular quotation is accurate. Russia is the country that owes the International Monetary Fund the largest amount of money. You might scale that by all kinds of other indicators. It is a big country, so partly it is a large number because it is a big country compared with an African country. In Russia's case, it is a debt owed to the Fund. Again, in contrast to the HIPC countries, we are not writing down that debt; they are repaying and they actually have repaid several billion dollars over the course of this year to the Fund as part of the program.

    Chairman LEACH. If the gentlelady would yield. The Chair wants to be very generous with time, because there aren't a whole lot of Members here, but I would indicate that we have gone about ten minutes. Can we wrap it up?

    Ms. WATERS. I guess I want to make the point that Russia has received a large new loan package even though it clearly failed to stick to its economic reform program. And for purposes of the question that I asked, my staff did a comparison with Uganda, which has been considered an economic success by IMF and the World Bank. It followed a structural adjustment program, has met all of its major macroeconomic stabilization targets for inflation, public spending, and reducing the fiscal deficit. Inflation has fallen to single digits from an average of over 250 percent in the mid-1980's and the fiscal deficit has been halved. All of this suggested a strong case for exceptional treatment.
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    In February of 1955 Uganda qualified by the Paris Club Naple's terms for debt stock reduction signaling a creditor recognition of the country's reform efforts. However, the boards of the IMF and the World Bank chose to delay action to provide debt relief until April 1998. For Uganda the cost of delay will be considerable. If countries in Africa that meet all of the economic requirements imposed upon them by the IMF still face delays in receiving debt relief and loans which they qualify, what chance do other African countries have when they fail to meet the economic requirements of a loan condition? Whether they did it for this or some of the other African countries, we see that these countries are literally choked because they can't repay debt and I don't care whether you restructure it or whether you forgive it. What I am looking at is what I consider favoritism, more generosity in relationship to Russia than in African countries, and I don't buy it.

    Chairman LEACH. I will give you 10 seconds to respond.

    Mr. TRUMAN. Russia doesn't qualify for the program that you are criticizing. I am not sure the comparison is apt, leaving aside the question whether the HIPC program could be improved, which we are trying to do. We have a hearing next week on it, I think.

    Chairman LEACH. When we broke up for the vote, Mr. Bachus had one more minute on his time. I would like to recognize you.

    Mr. BACHUS. For about six minutes?

    Chairman LEACH. Please. Try to be restrained, but there has been a precedent set. Please.
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    Mr. BACHUS. At least two.

    Mr. Truman, sometimes the departments don't—I don't know that they talk with each other and of course Treasury is the department that is making a lot of the arrangements with Russia, and I want to talk to you about some issues you don't think of when you think of Treasury by, only in this case because we are working with the Russians on different agreements and this could serve as an incentive. One of them is the fact of the issue of radioactive dumping into the Arctic Ocean. It has been established that Russia is dumping nuclear waste into the Arctic Ocean, which is a threat not only to the United States, but also to most of the countries that are a part of the IMF programs. I would ask you—I want you to do two things. I don't know if you can respond to this issue. I don't know how familiar you are with it, but would you respond to my request, and it can be in writing, what is the appreciation at Treasury concerning this issue? Have other agencies in the Government discussed it with you?

    Mr. TRUMAN. I would be glad to respond. I do not know that they have discussed with us, with the Treasury, this issue, but that doesn't mean they haven't. So I would prefer to respond to your question in writing what we know about it and what our involvement is with that issue.

    Mr. BACHUS. And I will send you some information on it. There has been a congressional hearing. It is a concern to Congress. It is something that I would ask you to include in any negotiations with Russia concerning financial cooperation or assistance and they have at least responded that they are aware of the problem. They understand the threat of the problem. It is obviously something that we should all be concerned with.
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    Mr. TRUMAN. As you are well aware, U.S. relations with Russia are very broad and we seek engagement on a large number of areas through various different mechanisms and forums. I am confident that this particular issue is being dealt with or trying to be dealt with somewhere. Whether it is appropriate to link it up with IMF lending is another question.

    Mr. BACHUS. I think you are making my point. I am saying to you I think it is appropriate to link it with any program where we have leverage to influence Russian activities including this. I would say to you that it is, but I would like you to review that and get back to me on that. My second point—and I am not talking about generosity here. I understand that generosity starts at home. I am talking about programs which could help stabilize Russia, which obviously is to a great benefit of the United States and our security, and Mr. Weldon mentioned a mortgage finance system similar to a Freddie Mac or a Fannie Mae. I would ask you to—and I think that our cooperation in that regard could be much less expensive than direct loans or some of the things we have done in lending stability to the Russian people. Obviously an establishment of a middle class is going to be necessary for a market economy. I would ask you to review that.

    Mr. TRUMAN. I would be glad to review it. This is an issue where I think there has been some dialogue between the Congress and the Administration in the Treasury before. I am not particularly knowledgeable in the area, but I will be pleased to look into that again and get back to you.

    Mr. BACHUS. And I would encourage you to have the Administration—I think this could be a minimum cost to the United States, but a tremendous amount of benefit in establishing a freer market and a more Democratic country than Russia.
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    My third one, consistent with this, is I mentioned the Freedom Support Act. You have also got, I learned, the Ed Muskie foreign exchange legislation. I would ask you—and I am not asking for a response right now, but to see what initiatives the Treasury Department has for the exchange of students under these programs. Particularly, the Edward S. Muskie graduate fellowship program is in business and economics and is intended to encourage students from Russia to gain a background in business, and I know that the USIA and the Congress is funding those programs, but I would like you to take a look at that, and I would like you to urge that any program which we justify is that we are trying to stabilize Russia, we are trying to establish free market, we are trying to strengthen their democratic processes, that it include this educational component.

    And finally, and I will wrap up with this and I won't take my whole time, Jamie McCormick on our staff and Joe Engelhard, they work very hard and Joe Pinder, they worked very hard in preparing for this hearing today and they reviewed multiple documents in getting us ready for it, and Keith Bush, who is on the next panel, has prepared the Russian Economy in June 1999, which is about 32 pages and Mr. Engelhard on my staff actually, as he handed this to me to prepare for this hearing, said ''This is required reading.'' This is a very good document. I would ask you to do this. I would like you to or someone in Treasury—I am sure that you are not in a closet over there. You are looking at what others have proposed. You know there is interchange with your different think tanks and associations here in Washington, but I would like you to take a look at this, tell me what is right about it, what is wrong about it, whether the picture that is painted here is accurate or not, but I also consider it to be a very good resource.

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    Mr. TRUMAN. We will take a look at that. My only hesitation is because until recently I was a member of a staff in which I sat behind Chairman Greenspan at these hearings and he will say, ''Of course, I will look at it.'' And I knew someone else was going to look at it. So I am a little hesitant to see whether my water is going to be spiked when I get back to the Treasury, but with that qualification we would be delighted to.

    Mr. BACHUS. One reason is that as we are considering this problem the first thing we need is to get our facts straight. We need to determine what is the status on Russia and establish a good record and I would like to know what your feelings are on this.

    Mr. TRUMAN. We would be glad to do that.

    Mr. BACHUS. Thank you.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you.

    Mr. Sanders.

    Mr. SANDERS. Thank you, Mr. Chairman.

    My questions revolve around three areas, philosophical, economic and the question of process related to IMF and our relationship to the IMF. Basically what the IMF does it seems to me is it goes to a country in need and it says if you would like to borrow some money, these are the things that you have to do. You have to do A, B, and C and sometimes people make it sound very much like a move toward a free economy, but very often really what it is about is cut back funding for education, cut back funding for food subsidies, cut back job programs, cut back on workers' rights and so forth and so on.
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    Now, from a philosophical point of view, do you think the United States should be involved in dealing with desperate countries, forcing them to increase economic suffering for their poorest people? That is my first question. The record is very clear that that is what has happened throughout the world, including Russia.

    My second question and maybe you have some specific information. My recollection is that before Russia defaulted on its loans it was paying over 100 percent on short-term bonds. I guess they called them OFZ bonds. My understanding is that large financial international institutions were providing funds, lending money to Russia at those extraordinarily outrageously high rates. I would like to know who those financial institutions were and I would like to know the relationship between those loans and IMF money. To what degree has IMF money ended up bailing out these financial institutions and specifically who are they?

    And my third question, Mr. Truman, is with process. In this United States Congress, we spend a lot of time debating international relations and we have a committee that does that, and so forth, yet it has always seemed to me that the IMF is clearly one of the most powerful institutions in the world that at any given time they are literally making the life and death and most basic decisions for dozens and dozens of countries around the world. In other words, they are saying to countries that this is what you—no matter what your democratic institutions may want to do, no matter what your legislature, your parliament may want to do, if you are to get money from us, this is what you have got to do, in a sense overriding the feelings of their own democratic institutions. Do you as a representative of the Treasury Department have a problem in terms of dictating policy to desperate countries which ends up causing serious political problems within those countries?
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    Ironically enough, I myself was delighted to see the dictator Suharto leave Indonesia. I find it ironic it was the IMF that forced him out. It was rather amusing. Be that as it may, I kind of think elected officials in foreign countries should be allowed to make their own decisions and not be dictated to.

    My question gets back to the issue of transparency. How can we have an institution which has life and death power over dozens of countries in this world and we don't even have transcripts or open discussion and votes? We don't have votes about how they make those decisions. What is our Treasury Department going to do to force open debates so that Members of the Congress and people throughout the world can know how this powerful institution is operating?

    Mr. TRUMAN. Let me try to answer those questions as best I can. Can I choose my own order?

    Mr. SANDERS. Yes.

    Mr. TRUMAN. On the OFZs, those are domestic instruments in Russia, denominated in rubles as you said, before the crisis. They had a very high interest rate on them. Many of them were held by foreign financial institutions. I don't have a detailed list. I am not sure anybody has a detailed list, but a large number of foreign financial institutions held them, and it so happens the OFZs were subject to the moratorium and their value has dropped substantially. So in this case, for better or for worse, because they have been settled, and no IMF money has gone to Russia since July of last year, no IMF money was involved.

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    Mr. SANDERS. That would not have been the case in the past? In other words, IMF money went to Russia. Russia was paying outrageously high interest rates. There is no reason to believe that IMF money was not involved in that process? Where would Russia get its money to pay off 100 percent interest rates if not from——

    Mr. TRUMAN. By the same way we get our money to pay our interest rates on our debts.

    Mr. SANDERS. But we don't borrow at 100 percent interest.

    Mr. TRUMAN. Yes, but sometimes it is higher and sometimes it is lower.

    Mr. SANDERS. Not the 100 percent that I know of.

    Mr. TRUMAN. And inflation hasn't gone as high as it has gone in Russia either.

    Your first and last questions are to some degree related. And we do—it is not going to surprise you that we have some philosophical differences, as you articulated. The IMF does not force countries to increase economic suffering. The IMF does not force countries to do anything. If a country wants to borrow from the IMF, it has standards that it applies and if the country feels that it is in its interest to apply for a loan from the IMF under those standards, then the IMF provides the loan. I think the philosophical question where we can differ is whether the country is better off taking a loan from the IMF on those standards or not.
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    And I, coming to your third question or part of your third question, that is—I think it is appropriately a political decision for the political leadership of the country to decide whether it is or is not better off.

    The second part of your third question had to do with IMF transparency. We have been doing a great deal on that. I think we had a hearing—the first hearing that this committee had with Secretary Rubin—which laid out the kind of things we had been promoting in terms of transparency in the International Monetary Fund. It may not be all that you would like, but I think we made substantial progress in terms of releasing documents outlining what countries have agreed to with the Fund, the Fund's views of countries, the Fund's discussion of policy issues. So the whole process of transparency, I think, has increased substantially over the last year or so.

    Mr. SANDERS. Last question, Mr. Chairman. What about votes? Are votes going to take place at the IMF? Votes, V-O-T-E-S, votes.

    Mr. TRUMAN. Most decisions at the IMF actually are not done by recorded votes.

    Mr. SANDERS. That is right. Despite the fact, I may say——

    Mr. TRUMAN. And when the United States is required by law to vote on an issue, our executive director in the Fund or the Bank will raise her pencil and say, ''Mr. Chairman, I want to be recorded as voting against this loan to whatever the country is in question.'' So that becomes a recorded vote and those votes are recorded. I don't know——
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    Mr. SANDERS. Do we know about them? Is that public information?

    Mr. TRUMAN. I don't know whether you know, but I will find out for you.

    Mr. SANDERS. If we tell you to use your voice and vote and you are telling us we don't know, I think there seems to be a——

    Mr. TRUMAN. My colleague tells me at least as far as we are concerned, whenever we vote no, it is public information.

    Mr. SANDERS. Mr. Chairman, you are the Chairman of this committee. Do you know of any no votes we have cast at the IMF?

    Chairman LEACH. I am confident we have cast no votes. Don't ask me which ones.

    Mr. SANDERS. OK. So we don't know very much.

    Chairman LEACH. Mr. Ryan.

    Mr. RYAN. Thank you. Welcome. It is nice to have you here today. I appreciate your coming by, Mr. Truman. I hope it is an OK experience for you being in front of the mike instead of behind the guy——
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    Chairman LEACH. If I could interrupt just for a second. To respond more forthrightly, for example, on issues like Vietnam, they become public instantaneously. There are a whole series that do become public, but I think your point that this Congress doesn't follow this issue very carefully is right as well.

    Please, Mr. Ryan.

    Mr. RYAN. I wanted to ask you a little more narrow question. I represent the First Congressional District in Wisconsin. Racine, Wisconsin, is one of those communities. Case Tractors is based in Racine, Wisconsin. The Administration worked on an agreement with Russia for a billion dollar agreement to export tractors and combines to Russia. This agreement not only involves obviously workers in the district that I serve, but this agreement actually involves 235 companies in 30 States representing more than 100,000 employees around the United States. As you may or may not know, I am sure you are following this quite closely and that is what I want to ask you about.

    This deal was supported by the U.S.-Russian Agriculture Plenary Session on March 23 which was chaired by Secretary Glickman with Russian Deputy Chairman Kulik. There was supposed to be a topic for discussion I believe between Vice President Gore and Primakov, who is now former Prime Minister Primakov. That was derailed, I believe, and canceled because of the Kosovo issues. Where is this situation now?

    The eventual outcome of this agreement, as you well know, depends on a number of factions, a number of factors, but primarily comes from strong support from the Administration. I would like to ask you in light of the current situation with Russia, does the Administration still support the agreement and how quickly do you think the implementation of this agreement can begin?
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    Mr. TRUMAN. Well, Mr. Ryan, let me step back a minute first. The Russian agriculture sector has some important problems and it is very important to the United States. I think that is where the support in consideration of this agreement is for involving U.S. companies in addressing this situation, improving the market for agriculture equipment in Russia in the interest of Russia and in the interest of the United States. And it is our interest to try to develop the agriculture sector in Russia on a private market basis to help Russia better to meet its needs. It is important in any of those projects in which we get involved that the financing be done in a way which is sound. We broadly support facilitating transactions that meet these standards.

    On the particular case in point—no pun intended—I don't know exactly where it stands. I assume it is an Export-Import Bank project and I think it depends on a number of considerations. The Eximbank itself has the standards it would apply in terms of these kinds of projects.

    Mr. RYAN. It is my understanding that preliminary discussions have been held with Exim financing.

    Mr. TRUMAN. Discussions with Eximbank go through various stages. Certainly companies may apply and they may get a preliminary commitment from the Export-Import Bank for financing. That may be subject to the nature of the final deal, which is largely decided on economic or financial terms in terms of the standards that are applied by the Export-Import Bank itself. Sometimes depending on what the nature of the project is, there may be broader considerations that are brought into play.
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    I am not quite sure at what stage this whole process is. It was mentioned to me, I will say, when I was in Russia with Deputy Secretary Summers in December and the Russian authorities mentioned this to us at that time that they were——

    Mr. RYAN. In December you said?

    Mr. TRUMAN. In December. So I have been aware of that proposal. We actually had a little trouble in December trying to track down from our side, meaning the United States Treasury, exactly what they were talking about. So my sense is that at that point, although it was a matter that was under discussion, it was not something that had yet gotten to the sort of full agreement stage.

    Mr. RYAN. It is my understanding the Administration was in favor of this, that Secretary Glickman did convey the Administration's policy that they wanted to advance with this agreement. It was on the agenda for Vice President Gore, Prime Minister Primakov. That meeting for other reasons was canceled. Where is the Administration? Is the Administration going to pick up where we left off? I believe the Administration, from what I read, was in support of this agreement. Is the Administration in support of this agreement?

    Mr. TRUMAN. I think we would be better off—I would rather write you on a letter on this. I don't want to be definitive one way or the other on this subject, so let me look into it and give you a letter on this subject.

    Mr. RYAN. I don't mean to be too—the point is there are 30 States, 235 companies that produce the parts that go on these Case tractors. This is an agreement with jobs hundreds of thousands of workers are looking to. This is an agreement that I believe the Administration was in favor of. I understand there have been other foreign policy issues that have taken precedence, but it seems that we can get back on the road toward implementing this agreement.
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    Mr. TRUMAN. Without going into detail, as I said at the beginning, development of the agriculture sector in Russia is very much everybody's business. Part of that aspect involves the actual equipment business. It is also important, however, that the agriculture sector be developed under principles of private standards rather than supporting some of the old inefficiencies, which is one of the policy considerations I understand that cuts on this particular——

    Mr. RYAN. That is precisely what this agreement is all about.

    Mr. TRUMAN. There are, I think, some differences of perspective, at least as to whether it meets those policy standards in terms of supporting private agriculture in Russia and in regard to whether they repay the loan. I will look at it in more detail.

    Mr. RYAN. If you could respond, I would appreciate it.

    Mr. TRUMAN. I will tell you what we understand the status of it is.

    Mr. RYAN. OK. Thank you.

    Chairman LEACH. The Chair would like to emphasize as a Midwesterner that the strength of the Midwestern economy is of vital significance to this country. Is that fair, Mr. Ryan?
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    Mr. RYAN. It is.

    Mr. TRUMAN. As you know, Mr. Chairman, I spent quite a lot of time in the Midwest myself, including Wisconsin.

    Mr. RYAN. Really, where?

    Mr. TRUMAN. My grandfather had a place on Lake Geneva, Wisconsin. I went there every year for nineteen years.

    Mr. RYAN. I represent Lake Geneva. It is a wonderful place. Please come back any time. I would be happy to show you around. Good small-mouth bass fishing if you are into that.

    Chairman LEACH. From the land of more lakes.

    Mr. VENTO. Well, in any case, we are in a great area and we would be happy to have you there. I know the Fed Chair used to come to Minnesota regularly, Mr. Chairman, and the predecessor of Mr. Greenspan did pretty well in the lake trout department.

    Mr. TRUMAN. I am well aware of that.

    Mr. VENTO. I am sure he talked about that. It is a good relaxing activity.
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    This is a pretty heavy topic today. I guess to put a little more optimistic, or hope it is optimistic to say—obviously one of the things we have often explored is looking at other options in terms of dealing with special problems at the IMF and World Bank facilities that we have to try and engender and attract private capital back into the marketplace such as in Russia are somewhat limited. They have been really, I think, reconstituted to try and do a job that maybe they are not suited for, but understanding that, realizing that trying to attract the private investment back into these areas, there are a lot of unusual problems in Russia that I think you have articulated here as well as possible, I suppose, dealing with the extent of corruption, the necessity, I guess. The hope is in the year ahead that they will develop a better banking system and banking regulations.

    A lot of this has to be grown from the ground up, because there isn't necessarily an institutional memory as there had been and experience as there were with some of the other Central European countries that are grudgingly making some adjustment and clearly problems with the regular trading partners that they have had, they have been somewhat isolated in terms of that. These types of markets have to be redeveloped and frankly the type of barter economy that has evolved. And some of the descriptions that political scientists have made to me I suppose indicate that most of the economic activity that takes place in Russia takes place in and around St. Petersburg and Moscow and there isn't much else that is there. It is a very serious plight when you have a nation of this size and of this responsibility and the people with this type of pride, I think a justifiable pride in some respects, for the accomplishments that they have made and with the type of weaponry and so forth that exists.

    What about the next year? Are they going—what is your predictions for some positive news? Are they going to hit the payment schedule that we have and are we going to have—what type of benchmarks are you going to be looking to, Mr. Truman, in this next year?
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    Mr. TRUMAN. Well, I think what we are looking for is that they will—this economic program that the previous government drew up and received the tentative support of the IMF management on—that they will be able to pass the legislation and take the actions that are necessary to activate that program, and that it will be associated with some lending from the World Bank. The overall program will be intended to basically do two things: to stabilize the macroeconomic situation and in the process make it possible to regularize their external financial relations and to promote structural reform in the banking system and other areas that improve the investment climate. That will, over time, attract more foreign direct investment, as you mentioned, into the economy.

    I don't want to hold out to you a forecast that I expect the next year will be an economic miracle in Russia. They face very serious circumstances. I think what most forecasters are saying is the situation will stabilize. The economy will start to improve, and you will find a modest—at best a modest—deceleration of inflation and maybe some modest positive growth. I think that given what they have gone through and where they are, I think that is probably the most optimistic one should be at this point in the immediate future.

    Mr. VENTO. Mr. Chairman, my own view is I think we need to find some other mechanisms, even in a small way, that would substantially work that would insulate some of the investment that might be attracted from the private sector to insulate it somehow from some of the other political and other criminal problems that have occurred here. I don't know how we can sort of transplant the entire——

    Mr. TRUMAN. You commented that a lot of the economic activity takes place in Moscow and St. Petersburg. That I think is a correct statement. One of the important things that was mentioned in some of the other comments by other Members and in my statement is that there are other parts of Russia and, in fact, it is important not to just concentrate on Moscow and St. Petersburg. Various programs, which may be small—sponsored for example, by either the U.S. Government or by the EBRD—can work with some of the regions which are more advanced in terms of setting up an environment that is more conducive to foreign investment. Indeed, there is a view—although it is true that some of the regions are in the sort of area of Moscow and St. Petersburg—that it is a big country where there are actually some rather positive developments in terms of the investment climate and the pace of economic activity.
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    So although it is not what I would describe as a terribly encouraging story, there are some signs that in some areas of Russia there are signs that some parts are doing better than others. The reason why they are doing better than others is that the political leadership in those parts of the country have been able to put in place regimes, legal and structural regimes, that have encouraged both domestic investment to take place and to some degree foreign investment. And I think it is important—we think that it is very important—that this kind of positive development be encouraged and, if anything, further supported as much as we can do that from outside, though in the first instance the initiative has to be taken by the authorities themselves. We can only supply some outside help.

    Mr. VENTO. I know you have been here a long time and I am kind of late on the scene with some of my questions and I understand you probably have repeated some. But this occurs to me—I mean, I, for one, believe that we ought to be involved in terms of trying to intervene with the IMF to try to prevent the collapse of the economy, because of what it means in terms of just global stability, but I think also in terms of a government of self-determination and some of the other values or goals that we have had. If it fails, it is obviously very likely that this could move back. It would be major steps backward into a more centrally controlled government both from a democratic, from an anti-democratic standpoint, with a small ''d,'' and from an economic standpoint. But the IMF, I mean, these programs, seems like they intend to be paying for existing problems and debts and are not actually facilitating the type of generation of new investment. They are paying for the pensions. They pay for a lot of other—they try to make the country viable because there is so much the former Soviet Union, and now the Commonwealth of Independent States, that have responsibilities to pay pensions, to in fact try to keep some of the service industries, whether it is transportation, lighting, and other things in place, and of course, trying to move into privatization with a fire sale isn't necessarily a good idea. So I don't think any of us would necessarily advocate that. It just occurs to me the type of generation that we need of movement is not in place and we need to look around for other mechanisms that insulate, can put in place a transplant of an enterprise that will not be completely sucked dry by a criminal or improper or bureaucratic problems, and right now I don't see that happening, and I think try to do that en masse and it would attract some investors and probably build the type of policy path and economic results that would in fact show the way. I think once that happens and once, whether it is co-ops or whatever the mechanism is, I just don't feel that right now, you know, that it is in place.
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    So I hope that in the year ahead we would have more optimistic news rather than just kind of maintaining the status quo. But I understand with the eminent elections and so forth that are coming up, it may not be the right time to do this, but I would hope these ideas would be developed so that when the next political structure we see take place, hopefully in an orderly manner in terms of democratic transition, that they would in fact be able to embrace these and move ahead.

    We visited some years ago, and I think very proud people want to get ahead and I think it sometimes lends itself to the type of political result that may be very adverse to our common interests.

    Mr. TRUMAN. Just let me make two points. One is that I agree with you, it is very important that we look for mechanisms that can advance this process in a variety of imaginative ways, advance this process to promote the investment environment in Russia. I think there are some mechanisms that have been successful. They haven't produced the great flowering that you and I would like yet, but I think there are some mechanisms and they can be built upon. I think my second point is also important—that one of the reasons why there hasn't been more of this is that there hasn't been the sustained stabilization of the macro-economic situation which is necessary to provide a foundation for these other structures to be built upon. If you have situations in which you are falling in and out of compliance with IMF programs, inflation rates now at 3 percent and then at 84 percent, and now you are being paid your wages and now you are not being paid your wages, it is very difficult for anybody—whether you are a common citizen or a worker-investor—to try to make decisions going forward. So that is why it is important as well to have stabilized the macro-economic situation on a sustained basis, so that these other kinds of structures and mechanisms can be put in place to provide the kind of pickup in growth and prosperity that we would like to see for Russia for all the reasons you have described.
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    Mr. VENTO. Thanks, Mr. Chairman.

    Thank you, Mr. Truman.

    Chairman LEACH. Thank you, Mr. Truman.

    Mr. Secretary, I would like to just conclude with one directional query. In this country we have a lot of experience with shared revenue management, so we have revenue sharing programs. We have programs in many areas that go through the States. One of the interesting aspects of the major Western aid that goes to Russia is that it is largely through the IMF, which goes to a central bank. In theory if you have a model in which the central bank disburses to private banks which then fleece the system and redirect the resources into a capital flight direction for the benefit of the few, one of the questions becomes are there ways of distributing funds that are novel to IMF? For example, can you distribute funds directly to provincial governments? Would it be better for the Russian public? For the IMF? If it has no capacity to do that, could the IMF make contracts with the World Bank that has some, in terms of lending to non-governmental structures at least, central governmental structures? Can one choose to reward those provinces that set up rule of law accountabilities more than others, or regions of Russia? The Siberian side of the Urals, for example, that tend to be away from where identified centers of corruption exist. And are these ideas that have been thought through at the Department of the Treasury or are they so anathema to the international system that one dare not think in such a way?

    Mr. TRUMAN. With respect to the International Monetary Fund, as you know, its financing is balance of payment financing, so the funds either go to the finance ministry or, in the case of Russia, the central bank. That is the nature of the finance funding you have. Money, however, is fungible.
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    The World Bank is a little bit more flexible, but most of its operations involve having a sovereign guarantee, but it does have some scope to make lending at the subnational level so that with the guarantee of the sovereign, you could—and the Bank has been exploring ways—you could have financing projects that are in regions that have a better record of reform. And the IFC, which is a particular window at the Bank, has a little bit more flexibility. The EBRD on the other hand, which, as you know, is primarily oriented toward private sector lending, has the most scope of the international organizations to lend to regions, because it actually is often—not exclusively, but often—outside of the sovereign public sector. We have been working with the EBRD in particular on ways in which they could help to—and they are themselves working on this—to try to see how they could maximize the return on their lending, in part by financing projects and making investments in areas where there has been a foundation laid, which are more receptive to the kinds of things we are trying to accomplish that we think are necessary for Russia as a whole to accomplish if it is going to make progress.

    There are some constraints in what one can do. There is some scope for using imagination—some, but not 100 percent, scope for using imagination—to try to bring about what you have been saying. I think, as far as the Treasury Department is concerned, we very much are trying to work with the Russians and the institutions themselves to think about ways in which we can accomplish exactly what you have in mind.

    Chairman LEACH. Thank you very much, Mr. Secretary. We appreciate your time and your thoughtfulness. I would also like to indicate that I understand your top aide Rick Sinkfeld is leaving and we want to express our appreciation for all the time he has put in in dealing with this committee. So we have a first speaker and a last representor and we believe the Department of the Treasury has made good decisions with both. Thank you very much.
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    Mr. TRUMAN. I myself have been privileged to work with Rick and I am going to miss him a great deal.

    Chairman LEACH. Good luck, Rick.

    Our next panel consists of Mr. David J. Kramer who is Associate Director of the Russian and Eurasian Program at the Carnegie Endowment for International Peace here in Washington, where he specializes in Russian domestic politics, U.S.-Russia relations, and U.S. aid policy to the former Soviet Union. Mr. Kramer received his M.A. from Harvard and B.A. from Tufts.

    He will be joined by Keith Bush, who is Director of Russian and Eurasian Program at the Center for Strategic and International Studies. Mr. Bush received his M.A. from Harvard.

    The two will be joined by Dr. Ariel Cohen. He is a well known Middle East-Russia NIS Central and Eastern European area expert. He is the Senior Policy Analyst of Russian and Eurasian Studies at the Heritage Foundation. Dr. Cohen has a law degree from the Bar Ilan University Law School and an M.A. and Ph.D. from the Fletcher School of Diplomacy.

    Our final witness will be John R. Price, who is Managing Director and head of the Chase Manhattan Corporation Government Affairs Group. Mr. Price did his undergraduate work in Iowa at Grinnell College. He was a Rhodes Scholar and received a degree from Queens College Oxford. He is also a graduate of the Harvard Law School.

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    We will begin in the order of the introductions. Mr. Kramer.


    Mr. KRAMER. Mr. Chairman, thanks very much for the invitation to appear here today on this very important subject and, in the interest of time and hunger, I will try to summarize my statement and ask that my written statement be submitted for the record.

    Chairman LEACH. Without objection. All of the full statements of witnesses will be placed in the record and you may proceed as you see fit. I apologize because we have gone on at perhaps greater length than we intended, but I would like to ask, if I could, if you could keep your comments to five minutes or so.

    Mr. Kramer.

    Mr. KRAMER. Mr. Chairman, with news reports about corruption appearing almost daily, Russia appears to many critics as a hopeless and helpless sinkhole undeserving of any further financial support. And after the disappearance of last July's $4.8 billion International Monetary Fund tranche and the continuation of capital flight out of Russia, many have argued against the IMF's recently promised resumption of support saying that this new installment of $4.5 billion simply amounts to throwing good money after bad.

    Let me say upfront that I support, albeit very reluctantly, the new $4.5 billion being proposed for Russia from the IMF with one crucial caveat. The entire $4.5 billion should be transferred from one IMF account to another IMF account in order to help offset Russia's debt to the Fund, which will still be $1.5 billion after this $4.5 billion is extended to Russia. It should not be transferred to Moscow where it will quickly vanish, as happened with the $4.8 billion last July. We simply can't risk the possibility that billions of dollars will once again disappear in foreign bank accounts or be misused by corrupt Russian officials.
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    The reason I am in reluctant support of the IMF money is that I, like many observers of Russia, am troubled by the constant political games that are being played in Moscow these days. The replacement of Yevgeny Primakov with Sergei Stepashin underscores the unpredictability and instability of Russia's political system, which is subject to the whim of one man—Boris Yeltsin. But my support is not predicated on whether Primakov or Stepashin is premier or even whether Yeltsin remains president.

    Yeltsin, by the way, I think is the biggest obstacle to Russia's future. Quite simply, regardless of who heads Russia's government, it is in our interest for Russia to avoid a default on its debts, an outcome I think is virtually guaranteed without IMF support and with unpredictable consequences. A default would shut Russia out from any possibility to receive international support for years, a price Russia should not have to pay now because of weak and incompetent leadership. Despite the Russian government's economic mismanagement, the West should do what it can, understanding that there are serious limits to what it in fact can do, to prevent Russia from becoming a rogue state, an outcome I think would be increased—the chances would be increased by a default. As it is, Russia is facing great difficulty in meeting its foreign debt payments, which in 1999 alone amount to roughly $17.5 billion, and to put this figure in perspective, Russia's federal budget revenues for this year are expected to be roughly $21 billion. So $17 billion in foreign debt, $21 billion in projected government revenues.

    Just last week Moscow failed to meet a payment of over $500 million on Soviet era debt to the London Club of commercial creditors. More than two-thirds of Russia's foreign debt is from the Soviet era. The $4.5 billion proposed by the IMF would in essence amount to a rescheduling of Russia's debt to the Fund. Additional rescheduling of Russia's debt payments by both the London and Paris Clubs and possibly even forgiveness of some Soviet era debt should follow an IMF package.
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    These steps I think would amount to a recognition by the West of what will happen in any event and the West might as well claim some credit for it. It should not, however, be viewed as a waiver of Russia's financial obligations nor an endorsement of the Russian government, given its handling of the economy has not merited such backing.

    To underscore Western concern about the lack of reform in Russia, World Bank money in my view that has been expected to follow an IMF accord should be withheld. World Bank money would not solve even temporarily Russia's debt problems and instead, given the Bank's track record with past loans, new money I fear would disappear if lent directly to Russia.

    Some observers have argued that the West missed an opportunity at the outset in 1992 to have provided a massive amount of aid to Russia on the scale of a Marshall Plan. I think leaving aside the difficulty in rallying Western support for a massive aid package, the inability of Russia then to absorb large inflows and the government's wavering path of reform would have resulted in a misuse and loss of billions of Western dollars. We kid ourselves, I think, and grossly exaggerate our influence if we truly believe that the West could have tipped the balance early-on in favor of the reform oriented government. The failure of people like Yegor Gaidar and Anatoly Chubais to build a political base for their program and their inattention to the social implications of what they were trying to do were their fault, not the West's.

    Moreover, since 1992, Russia has received tens of billions of dollars in assistance from the West, including more than $2 billion from the U.S., not counting Nunn-Lugar money through the Freedom Support Act.

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    My main complaint with U.S. assistance is that it has tried to cover too much ground and as a result has spread itself too thin. Instead, our aid program should concentrate on just a few goals.

    Germany, another country that has been a big loaner to Russia, has provided tens of billions of dollars, largely via compensation for the reunification of Germany and the withdrawal of Soviet troops from the former East Germany. And while not intended, the large sums of money lent to Russia in the past seven years have significantly added to Russia's debt burden.

    Furthermore, international assistance has paradoxically contributed to Russia's problems to some extent by removing the incentive to reform and serving as a crutch for Russia to fall back on.

    The IMF has loaned Russia roughly $20 billion over the past seven years and its sister institution, the World Bank, has lent Russia roughly $11 billion, both since 1992. Both institutions, in my view, do a bad job of tracking where their money goes. The $500 million coal loan from the World Bank in 1996 and 1997, for example, is unaccounted for and has been the subject of several investigations in Russia; and both, as I say, do not follow where their money goes.

    Why, after all of this money has been lent to Russia, aren't things better? Why isn't Russia in a better state? One explanation I think involves some of the advice that has been given and some of the technical assistance. It has had its problems, there is no question. But I think attributing Russia's problems to faulty advice from the West tends to overstate the influence of Western advice and support. The responsibility for what has happened in Russia since 1992 lies first and foremost with Russia's leaders.
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    More importantly, I think Russia has had an enormously difficult legacy to overcome, and to expect that its development would be much better than it has been is to expect too much. Contributing to the perception that things are so bad has been a tendency, particularly in the first half of this decade, among many analysts and government officials, Russian and Western, to overbill and exaggerate the progress Russia has made since 1991. They have prematurely treated Russia as a democratic economy and similar exaggeration has been made about the state of Russian-U.S. relations, particularly when Andrei Kozyrev was foreign minister.

    It is difficult to overstate the challenge Russia faces in trying to overcome the horrible legacy and debilitating impact of decades of foreign rule. Upon the breakup of the Soviet Union, many observers said it would take a generation at least for Russia to recover from its legacy. We are only eight years into this transformation. Some observers have been premature to declare the worst over and the battle won, and others, I think, have unreasonably set high hurdles for Russia to clear and short timetables for Russia to meet.

    Notwithstanding the political shenanigans in Moscow, Russia has survived another winter despite dire predictions of starvation in some remote regions. Indeed, life has been tough for many people since last August's crisis. Yet for most, life has been difficult for many years, both during and since the Soviet Union. Russians have an uncanny knack for getting by, and have demonstrated once again a high level of tolerance for inept government behavior. Fears of starvation voiced in the early 1990's were never realized, and without underestimating the seriousness of the current problem, the picture that has been painted over the past few months is equally overblown.

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    The U.S. Department of Agriculture, eager to help domestic farmers, I think unfortunately, has been the driving force behind food aid. But the aid that was supposed to have helped Russia survive a tough winter only started arriving in mid-March. As in the early 1990's, the risk again is that U.S. food aid will not help those in need, but instead line the pockets of corrupt government officials; and just last week, Prime Minister Stepashin launched an investigation into how food aid has been handled in the past.

    What else can we do? Frankly, not much beyond supporting the IMF package, and again I underscore my lack of enthusiasm in supporting that package. Exchanges are crucial and they have been a staple of U.S. assistance since the Freedom Support Act. Support for organizations like the National Democratic Institute, the International Republican Institute and the Eurasia Foundation, I think, also are the right thing to do.

    We need to place greater emphasis on the regions, as has been mentioned here this morning, and bring governors who are also members of the Federation Council and others from Russia's regions outside of Moscow to the United States. Nunn-Lugar assistance I would also continue to support.

    The U.S. is faced with a true dilemma. While recognizing that it has little influence and serious limits on what it can do in Russia, the U.S. also has a big stake in Russia to avoid action entirely. It is almost truistic, I think, to point out Russia's importance as a major nuclear power, its geostrategic location, and its economic potential. Moreover, Russia's role toward the end of the Kosovo crisis shows it can, at times, play a positive role in world affairs.

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    At the same time, until Boris Yeltsin leaves the scene in Moscow one way or another, I don't think we will see much hope for change in Russia.

    Nevertheless, staying engaged during the remainder of Yeltsin's tenure is vital for our future relationship with Moscow, and the IMF deal, if handled properly, will demonstrate the West still cares about Russia. Disengaging would only lead to a much higher price to pay in the future.

    Madeleine Albright said last fall in Chicago: ''We cannot say that Russia has lost its way when in fact it has just begun its journey. Nor can we say that Russia is ours to lose. We can help Russia make tough choices, but in the end it must choose what kind of country it is going to be.''

    Indeed, Russia is not ours to lose, just as it is not ours to win. All the support and aid in the world will not make a difference if Russia and her leaders do not get serious in reforming the Communist legacy. Where we can make a difference, we do so at the margins at best.

    Mr. Chairman, in conclusion, just as many observers were premature in declaring victory for the democratic market forces in Russia, we now need to avoid sounding the premature death knell for that country and for the U.S.-Russia relationship. Realistic expectations and honest assessments of where we are are long overdue on both sides of the ocean.

    Chairman LEACH. Thank you very much, Mr. Kramer.

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    Mr. Bush.


    Mr. BUSH. Mr. Chairman, thank you very much for the opportunity to appear here. It is a great privilege. Mr. Bachus was very kind in referring to this document. I would like to add that it is updated almost every workday, and if somebody is planning a trip to Moscow or St. Petersburg, just give me an e-mail message and I will supply the latest version, because the situation does change rather rapidly and we shouldn't make assumptions or deliberations on the basis of outdated and incorrect information.

    I will limit my remarks to four main topics to provide a factual context for your deliberations.

    First is the size of the Russian debt; second, the size of the Third World debt to Russia, which is very relevant, I think; third, the size of the Russian economy today; and future prospects for its growth over the next few years, distinguishing between the raw material sector and the manufacturing sector.

    In August 1998, the Russian government defaulted on its short-term ruble-denominated domestic debt that was estimated prior to the devaluation of the ruble, at some $40 billion. It has started to default, that is, it has not serviced, its Soviet-era debt. When Russia took over the Soviet debts and Soviet assets, the ''Soviet-era'' debt amounted to some $103 billion. Also, it is evident that it will face severe problems in servicing its Russian debt, that is, the debt incurred since January of 1992, which is valued at about $50 billion.
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    So if you include the defaulted amount, last August Russia owed nearly $200 billion.

    It is possible, though not probable, that the Russian government will be unable to service its debt to the IMF, which amounts to $4.6 billion, which would consign it to the dog house of financial pariah states. But I think this is very unlikely. I think the IMF will extend the first tranche shortly, because afterwards the World Bank will make available some $2 billion, the Japanese government another $1 billion, and then, most importantly, Russia will be able to go to the Paris and London Clubs to talk about rescheduling its debt and partial forgiveness.

    We have already heard today that the Russian economy is something like 55 percent of what it was in 1989. It now has a GDP officially of 4 trillion rubles. At the official rate of exchange, this is equivalent to $160 billion, which is less than 2 percent of the U.S. GDP. At purchasing power parity, it is equivalent to about $617 billion, which puts it in the same ballpark as Spain, which has less than a third of its population.

    Recent developments, with four governments in fourteen months, have not been conducive to stability or to strategic planning. Primakov was in office for eight of those months, and he achieved great political stabilization, but at the cost of economic restructuring. The only item of economic restructuring that I can recall is his promotion of the production-sharing agreement and the enabling legislation through the Duma. Otherwise, very little was done.

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    Of the 1,500 commercial banks, over half of them are technically insolvent. The budget was rushed through the Duma, which was a great achievement, but it was wholly unrealistic in its assumptions. Very few manufacturing firms have been declared bankrupt, even though several thousand value-subtracting enterprises continue to operate.

    The prospects for the next year are equally gloomy in that I don't think a stable government or any other prime minister can do very much during the run up to the Duma elections in December and the presidential elections next year. So I don't think that Mr. Stepashin will have much success in moving much faster than Mr. Primakov did.

    Prospects: It is difficult to forecast what is going to happen in the Russian economy or in Russia itself. In the manufacturing sector, the average age of plant and equipment is three times higher than that of the OECD average. The only products where Russia is competitive on the world market are making military hardware, space engineering, and nuclear engineering. The domestic demand for these products is severely restricted by budgetary constraints, and the overseas market is limited.

    To replace or update this aged plant and equipment will require tens and probably hundreds of billions of dollars. But the domestic ruble money supply is equivalent to less than $20 billion, and there is another $30 billion in American currency which is mostly stacked under people's mattresses, because the Russian citizen, with good cause, does not trust his government and does not trust his banks to handle that money. Only when Western banks are allowed into the retail banking sector and given incentives to do so will some of those dollars be put to some use.

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    Therefore, where will this investment come from? It must come from abroad in the form of foreign direct investment.

    Russia is currently attracting less than 1 percent of global foreign direct investment—FDI. It attracted $2 billion last year in net FDI out of a world total of $420 billion, in the same year China attracted over $40 billion. The reasons are well-known. They include political instability, virtual absence of corporate governance, capricious and exorbitant taxes, the lack of commercial infrastructure, poor protection of copyrights, pervasive corruption and the depredations of organized crime. This is a hostile environment for foreign investment which will take many years to correct.

    Now, the picture is different for the extractive sectors, in that production-sharing legislation is going through. They have enormous resources which will, I believe, be tapped by Western firms, and so we shall probably see a recovery in the extractive sectors. But in the manufacturing sector, the outlook is rather dismal.

    Now, if domestic capital is inadequate, if foreign direct investment is not going to come through the manufacturing sector, where will the money come from? The previous administration, the First Deputy Prime Minister, Yuri Maslyukov, assured the Duma that the money would come from the state budget, but the state budget, as David Kramer has already explained, is extremely tight.

    With revenues of $19 billion this year and foreign debt service of $17.5 billion, there is not much money left over there to pay the soldiers, the doctors and the teachers, let alone running the government. Moreover, the Russian government is facing a tremendous health crisis. The health statistics, and I can go into detail, are poor. They are in many cases worse than a Third World country.
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    It has grave environmental problems. The Soviet authorities did virtually nothing to protect the environment.

    And third, it needs to put much more funding into the educational system. One of the few positive legacies of the Soviet period was a good educational system, but this has been very sadly neglected.

    So with its vast natural resources and with its highly educated work force, Russia's economy will surely experience the boom or the miracle predicted for it by many informed observers, but this will not happen soon.

    Chairman LEACH. Thank you very much, Mr. Bush.

    Dr. Cohen.


    Dr. COHEN. Thank you, Mr. Chairman. It is a great pleasure to testify before this distinguished committee.

    On April 28th, amid deteriorating relations between Russia and the United States over the crisis in Serbia, the IMF Managing Director, Michel Camdessus, and then-First Deputy Prime Minister Maslyukov announced a preliminary agreement to lend Russia $4.5 billion over the next eighteen months. As David Kramer observed correctly, the intention of that is just to cover Russia's debt to the IMF and to prevent Russia's default on the IMF loans. However, at the same time, Russia's default on other international obligations is ongoing.
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    The funds would remain in the West, and the conditionality of this lending should be as it was in the past. In other words, the Russian government should provide an explanation of how earlier loans, allegedly misused or embezzled by Russian officials have been disbursed. The Duma, dominated by Communist nationalists, will need to pass a bankruptcy law, the state will need to increase tax collection and overhaul the banking system.

    In the past, the Duma repeatedly torpedoed Russia's obligations to the IMF, but the IMF continued to lend. The outlook for passing of these measures is not optimistic. However, it is my prediction that the IMF will disburse the loan, nevertheless. The question remains, why would they do that?

    Ironically, the cost of a war sharply illuminated Moscow's dilemma. It desperately needed the United States support, but it continued, at least in the initial stages of the war, to pursue an anti-American foreign policy.

    The U.S. and IMF officials admit that the loans are extremely politicized. First, they depict the loan as a political payoff to Russia for a cooperation in finding a solution in Kosovo. Second, they say the new credit is a move by the Clinton Administration to prevent Russia from destabilizing further prior to the December 1999 parliamentary and June 2000 presidential elections.

    If the new IMF loan to Russia is based on economic criteria, the Russian economic performance clearly indicates that the new loans are not only ill-advised, but are totally unjustified. If the IMF loans to Russia are based on foreign policy national security considerations, the Clinton Administration should openly say so. However, the IMF is not a branch of the national U.S. Security Council and American foreign policy considerations cannot drive the IMF decisionmaking. It was and should remain essentially an economic decisionmaking body.
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    Nor does the IMF currently have the foreign policy/national security analysis and decisionmaking capabilities that may make competent that organization to pass judgments on issues of war and peace. This precedent-setting decision is fundamentally wrong, as IMF always justified granting of credits on economic, not foreign policy, terms.

    I would like to focus in particular on a major scandal that erupted in relation to Russia's foreign policy.

    On February 1, 1999, Russia's ex-prosecutor general, Yury Skuratov, revealed in a letter to the Duma chairman that the Russian Central Bank had placed, according to Skuratov, up to $50 billion, Mr. Chairman, to a previously unknown offshore asset management company registered in the Jersey Islands called the FIMACO, Finance Investment Management Company. The Paris-based Eurobank, which is owned by the Russian Central Bank, set up FIMACO in 1990 in the Soviet era, using $1,000 in startup capital. I would like to stress that during that time it was normally the KGB foreign operatives who were involved in major financial transactions. Over time, according to Russia's prosecutor general, FIMACO was handling between $37 and $50 billion of Russian Central Bank assets and about $13 billion of its currencies.

    Mr. Skuratov, at the same time he was making these allegations, was also investigating high-level corruption in the Kremlin connected to a Swiss company, MABETEX. In the course of that investigation, the Swiss prosecutor general forwarded to the Russian government a list of senior Russian officials who allegedly had accounts in Switzerland. During these investigations, Skuratov was fired. In fact, he was fired twice by President Yeltsin. Shortly after that announcement, Skuratov ended up in a Kremlin hospital and tried to resume his duties a month later and was barred from performing his duties.
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    Foreign governments usually manage their own reserves or utilize services of major Wall Street or London investment firms. They do not do it with $1,000 in startup capital in the Jersey Islands.

    However, both the current and the previous chairman of the Russian Central Bank, one reformer and one Communist-allied Central Bank, Mr. Gerashchenko, justified these practices. Gerashchenko said that in 1999 Russia did not have facilities or instruments to manage its foreign assets. Dubinin, the reformer, went even further. He justified setup of FIMACO by saying that it was set up to hide assets from foreign creditors, and therefore, the actions were justified.

    According to the former Finance Minister, Boris Fedorov, as quoting the Russian media, he said the following: ''As I understand it, friends were given a chance to make some money.'' And senior Russian government officials admitted that what FIMACO, among other things, was to play the short-term bond market with interest, not just 100 percent, as someone mentioned here, but up to and over 250 percent a year; and in one transaction I came across in the Russian media, the interest FIMACO made between March and September of 1996 was $39.9 million with an investment of $143 million. You don't have to be a rocket scientist to calculate the rates of return.

    Did the IMF know about this? According to Russian officials, at first they said did not know. However, on February 18, 1999, Deputy Central Bank Chairman Oleg Mozhaiskov claimed that IMF knew of the arrangement. On March 22nd, former Central Bank Chairman Dubinin also admitted that IMF knew about FIMACO, but still insisted that Russia did nothing wrong.
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    Amidst all of this, the former Deputy Prime Minister Maslyukov, a Communist, after the agreement to provide $4.5 billion to Russia was announced, claimed that the Western international finance organizations should forgive 75 percent of the Soviet debt. I would mention to this committee, Mr. Chairman, that Mr. Maslyukov was the last Soviet chairman of the central planning authority and was instrumental during the Gorbechev years in building this huge $100 billion debt.

    Forgiving Russia's debt or covering its existing payments will create what economists call a moral hazard. Bailing out well-connected private investors who took advantage of the astronomic yields earlier in the Russian stock and bond markets after the fall of the Soviet Union and allowing them to avoid staggering loss from this risky investment will further encourage risky investments in Russia and other emerging markets. And Western taxpayers will be asked to cover these losses for these poor decisions.

    Whatever the lending amounts from the IMF and World Bank and others will be, as my colleague, Keith Bush pointed out, the amounts necessary to rebuild the Russian economy are much higher. The Western financial organizations will not resolve this problem. It can be only resolved by creating a conducive economic climate in Russia that will attract both domestic and foreign investment.

    As you know, Mr. Chairman, it is the Russians who vote with their feet, so to speak, or the Russian money which votes with their feet, because the rates of capital flight from Russia are much higher than the Western private investor and government assistance combined.

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    In my written testimony, I outline both the problems and some avenues for solution of these economic problems, and if you have time, I will be very happy if you and your colleagues could read that.

    To summarize, Russia today is a difficult foreign policy partner and not a good economic risk. The IMF decision to extend new credits to Russia makes little sense in light of these two liabilities. Russia already owes the West over $148.6 billion. It is likely to default on at least a portion of the $17.45 billion in principal and interest it is obligated to pay on its debt this year alone.

    The Russian government already has planned to intentionally fail to meet this debt schedule. The 1999 budget approved by the state Duma includes only $9.5 billion for repayment of foreign debt. Out of this, only about $4.6 billion is projected to come from budgetary sources and about $5 billion is projected to come from abroad. Even if the $4.5 billion goes through over eighteen months, this is not a realistic projection.

    In light of Moscow's demonstrated inability to deal with its own economic problems responsibly and honestly, this Congress should demand that the Clinton Administration direct the U.S. executive director of the IMF to oppose additional loans to Russia. In view of the FIMACO scandal and in light of media reports, the IMF may have known that these funds were siphoned off by the Russian Central Bank officials to enrich private interests. Congress may consider conducting special hearings on disbursement of the IMF and other financial aid to Russia.

    Congress may also investigate the connections between the continuous massive lending to Russia by the IMF and the role of the U.S. Treasury in this process and the political influence of those who directly benefited in this country from Russia's misguided financial policies.
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    Thank you very much.

    Chairman LEACH. Thank you, sir.

    Mr. Price.


    Mr. PRICE. Good afternoon, Mr. Chairman, Mr. LaFalce. Thank you very much for permitting me to participate with this very distinguished panel today on a matter of such importance to our country, both our economic sector and our political sector.

    I am testifying before you today in my capacity as a member of the U.S.-Russia Business Council, which was formed in 1993 and which consists of 250 corporations ranging from small- and medium-sized entrepreneurs all the way through Fortune 100 companies, all of which have taken a sustained and deep interest in activities in Russia. In fact, a survey of our clientele showed that despite the problems of this past year, that far and away the bulk of the organizations in the Council are staying in for the long run in Russia.

    My remarks today will focus on the banking sector. However, there is a central need in order for Russia's economic development to proceed to create an environment of predictability, of equitable treatment of all investors or creditors and in short, of the rule of law. The creation of a more hospitable environment will lead not only to the willingness of foreign investors to place their bets on Russia, it will induce home the billions of dollars of flight capital which have moved to Cyprus, Switzerland, the Baltics and elsewhere.
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    What Russia needs to create, as I put it, is a passport-blind environment for capital investment. The change in Russia's fate would be dramatically improved.

    Six years ago, our bank, in working with our corporate clients from all industry sectors, reviewed the wish lists of those clients for investments prospectively in Russia. They totaled in excess of $17 billion. Virtually none of that potential has been realized because of the uncertain course of economic reform in Russia and the resistance of many powerful local figures to allowing serious, or at least not seriously threatened, equity positions of foreign investors.

    For all of this, there are some hopeful signs. There are some green shoots in Russian industry in the spring. Partly as a consequence of the devaluation last year, there has been a growth in smaller and medium Russian producers. These are both in the export sector and in the import business, especially in the consumer goods area. As a consequence, there has been some stabilization and even occasional growth in the reserves of the Russian Central Bank.

    The banking sector is at the center of the storm. In the early days of the transition from the Soviet Union, the banking sector was the scene of explosive growth. Newly chartered banks sprouted throughout Russia, growing to over 4,000 in number. Most were undercapitalized; few had any sense of the role of the private sector banking industry. Many were crudely modeled on the German structure of equity holdings by banks in corporate shares, which later came to be used as a means to grab control of many of the natural resource companies which were, themselves, going through various types of privatization.
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    Almost none of the banks have what we would call a credit culture. As well, deposits were gathered in the absence of any form of deposit insurance scheme. The level of regulatory oversight was minimal. In short, it was a prescription for trouble.

    The Central Bank charged with regulatory oversight of the industry, struggled to develop elemental standards of supervision and of licensing. Well before the August crisis, many licenses had, in fact, been revoked. At the same time, recognizing the essential weakness of the system, the Central Bank of Russia resisted attempts by some in the Duma to create a deposit insurance scheme, fearing that the moral hazard would be enormous given the precarious nature of the banks. Still, the Central Bank was not able to fend off the problems that have almost brought down the commercial banking industry there.

    Many of the banks, especially the larger, Moscow-based ones, focused not just on wresting controlling blocs of corporate equities, but also in the government finance market. They were providing credit to the public finance sector, but not the fledgling corporate sector. The returns, as we have heard this morning on the government bond markets, were alluring and they have crowded out regular commercial and industrial lending. The default on the government debt brought much of the industry to collapse. The larger Moscow banks, which had been most aggressive, were hit hard.

    More than a few of the regional banks weathered the storm because they had not been in the highly speculative GKO business, but had been trying, in fact, to build a banking business. And in fact, some of those small regional banks today are quite liquid, are doing well, and are thinking of expansion.
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    The disaster, though, was mostly a general and widespread disaster. There was not a legislative framework for bankruptcy and in many respects, there still is not one. Second, the capital requirements for liquidation of all of the banks that were truly insolvent were loans beyond the resources available to the Central Bank, and the treatment of cases of bank collapse was not without political interference from extremely powerful and well-connected owners of the banks. A slow process ensued in which there was finally created a government restructuring entity called ARKO for asset restructuring for credit organizations.

    With limited capital, the organization has prioritized its efforts to shore up some 69 regional banks, since it lacks enough money to properly liquidate any one of the major banks. Yet, this is still a difficult process. There is no real control in the hands of ARKO, and the shareholders still have enormous influence on the structuring process.

    Legislation was given its first reading in the Duma last week to improve the control of ARKO over the process.

    Let me just move to a conclusion, which is to say, as all of us would recognize, that the solution for the problem ultimately lies in the hands of Russia itself, and we can only try to assist and to encourage them. I don't think we can any longer prescribe for them. It is very important that we continue government-to-government efforts, and we must also very strongly encourage the efforts by the Congress and the Duma to interact on a much more broad and frequent basis.

    I am happy, Mr. Chairman and Mr. LaFalce, to answer whatever questions you may have.
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    Chairman LEACH. Thank you very much.

    I would like to begin with a question on numbers, and that is, clearly there has been enormous capital flight from Russia; clearly, it has been heavily involved in conflicts of interest, what in a Western sense would be considered blatant corruption.

    Dr. Cohen, you mentioned an institution called FIMACO. I assume that this is a corrupt institution, but the number $50 billion is of mind-boggling dimension. Have you verified the figure? Can you verify the figure?

    Dr. COHEN. Mr. Chairman, the number $50 billion was quoted by the prosecutor general of Russia.

    Chairman LEACH. I agree with that.

    Dr. COHEN. And the way it was interpreted later on was this was the amount of money circled through that company. It wasn't a one-time allocation of $50 billion. But they invested it, they took it out, they repatriated back to the Central Bank, they put in new money. The timeframe we are looking at is 1990 when the Soviet Union was still in existence, and when the foreign intelligence department of the KGB was trying to set up Western companies to siphon off some of the Communist Party money, all over until 1996; at which point FIMACO apparently was used—apparently, I stress—to finance President Yeltsin's election campaign; according to the Russian law, it would be illegal to do so; and then, before or after the election of 1996, the company was terminated.
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    The parent company of FIMACO is a bank set up by the Russian Central Bank, I believe with headquarters in Paris, France, and that is the Eurobank. So from there, what really needs to be done is a forensic audit. And the Russian Duma commissioned PriceWaterhouseCoopers, to conduct an audit of the Central Bank, where the foreign affiliates of the Central Bank are included in such an audit and whether the audit, as controlled by the Russian Duma, is an impartial audit remains an open question.

    What I would suggest is that the IMF, the Treasury, and possibly the World Bank, and private creditors, private Western banks that are owed in excess of $40 billion talk to each other and possibly set up a forensic audit of that system.

    Chairman LEACH. That is a very interesting suggestion.

    Dr. COHEN. And possibly make it a conditional provision of any further credit until such audit comes back and possibly even reported to this committee.

    Chairman LEACH. Very interesting suggestion.

    Dr. COHEN. Thank you, sir.

    Chairman LEACH. Mr. LaFalce.

    Mr. LAFALCE. No questions, Mr. Chairman.

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    Chairman LEACH. Mr. Price, you work in a private bank. At one point in time, there was an assumption that Western banks in Russia could serve a very important role that would go beyond simply servicing Western companies working in Russia. My sense is that that role has never developed very far.

    What are the obstacles in that, that is, the role of a foreign bank, whether it be a Deutsche Bank, a Chase, becoming a Russian domestic bank for substantial Russian domestic deposits; and what is the potential of foreign banks becoming the beacon of security? I mean, if I am a Russian living in Moscow and I have saved a little money, the last thing I would want to do would be to give it to a Russian bank, but I would feel more comfortable giving it to Chase Manhattan, Deutsche Bank, or Barclays.

    Has the role of the Western banks really developed?

    Mr. PRICE. There has been a sea change in the apparent attitude of Russian regulators and even legislators. Leaving aside Chase, because our worldwide strategy is that of a cross-border wholesale bank, not a retail bank unlike, say, Citibank—leaving us aside, there is movement in Russia now toward expanding the prospective role of the foreign banks, and this is true whether you talk to the Russian bankers federation there, equivalent of the ABA, or whether you talk to Duma members or to the regulators. There is pending a proposal to move from about 12 percent of total bank capital in the system to 25 percent, the permissible total amount of foreign bank capital in the system.

    At the same time, there has been an administrative ban, or shall we say a process where banks, foreign banks, were not able to open branches outside their principal city. There was a two-year review process and it, in effect, acted as an entire barrier on this.
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    I think frankly the Russians are now much more receptive for the very reasons you mentioned. They want to kick-start more of a consumer economy, but the problem is, they are throwing a party and nobody wants to come for the various other reasons that have been described here this morning of the lack of a certainty of a rule of law, of treatment of equity, of courts being dependable, of arbitration procedures—if you get that far—being something you can trust.

    But I think that there is a lot more willingness now, and the share of retail deposits that has gone to the bank, for example, has gone from 60 percent before the crisis to 80 percent now. There is still an awful lot of mattress money out there and a lot of room for the attraction of deposits by legitimate and trustworthy institutions which build confidence.

    Chairman LEACH. Well, it strikes me as virtually in American national interests, or the Western national interests, that the banking system in Russia work, and it strikes me that, therefore, Western institutions ought to be encouraged to become more massively involved at, frankly, the retail level. Whether that is against your bank strategy or not, the chains of Western banks in Russia might do more good for the Russian financial infrastructure than otherwise.

    Putting Russia aside, everybody knows that protectionism is alive and well in all countries of the world, but that finance probably is the most counterproductive protectionism of all. And I think perhaps Russia symbolizes that the most of all countries, and that maybe the single greatest thing that we ought to be pressing for is an opening up of banking in Russia to Western institutions to bring about secure places for people to put their money, because essentially speaking, a bank like Citi or Chase comes under the rubric of America law, in many ways, even though it may be located in Bangladesh or Indonesia or Moscow, or this country, and that should be a very secure thing for a Russian citizen, even though his or her own law may not be perfect.
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    Mr. PRICE. Well, one of our competitors, Citibank, is said to be doing land office business in Indonesia these days, attracting local deposits, because people have confidence in the ability of an American bank or a German or an English bank to provide security.

    One thing people lose sight of is WTO accession agreements. Russia, you remember, at the time of the Denver backslide by Mr. Clinton, was told that Russia looked like a very prospective or imminent member. The China suggestions have sort of come between Russia at the end of the queue. But nonetheless, if Russia does join WTO, they will have to make a number of commitments because WTO now includes a financial services element and goes very much toward what you are speaking of, Mr. Chairman.

    Mr. KRAMER. Could I just add on the issue of banking, it is difficult, I think, to understate the impact last August's crisis had on people's confidence in Russian banks. I can speak on behalf of my organization, where we have 35 people working for us in Moscow, all of whom are Russian, except for the director, and we were forced, unfortunately, to switch from using our Russian bank to using an American bank with an office there.

    And I also know that the confidence of our employees and also many other Russians in placing their money and deposits in Russian banks has been badly, badly shaken by the crisis.

    Dr. COHEN. On the same point, Mr. Chairman, the Russian banks actually owed the Russian people; they destroyed the confidence that the Russian people placed in these banks, and I think it is only fair for the Russians and for competitive practices to demand from the Russian government to allow limited or unlimited—depends on what kind of deal you can get—but to allow Western banks, retail and commercial and investment, to open their offices in Russia. Even Mr. Primakov, who was one of the more hard-line, more protectionist leaders in Russia, started talking about that last fall and then was stopped in his tracks, I don't know through which mechanism.
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    Unfortunately, today, with Primakov out of the picture, it is the same Russian bankers or, as they are often referred to, oligarchs, who have more, not less, clout with the current cabinet and with the Yeltsin administration. These are the main obstacles to opening the Russian banking system to foreign participation.

    Chairman LEACH. Let me give you an analogy to arms control.

    Sometimes, through international agreements, you can cause changes that wouldn't otherwise be naturally taken by legislatures, and that is one of the pluses of WTO, which, if we emphasize the financial element of WTO, that might be a way of precipitating an event that you would have a hard time getting a majority vote on in a legislature—any legislature, such as the Duma or whatever, or for that matter, provincial legislators that sometimes may have a role in this sort of thing. But I think it is something we ought to be emphasizing dramatically as a national security issue within our own country related to the future of Russia.

    Mr. Bachus, did you have a question?

    Mr. BACHUS. Thank you. Let me ask the panel this.

    Mr. Bush, one concrete suggestion that you made is that we not just—it says here that unless Western banks are given guaranteed and secure access to the Russian retail banking system and provided with sufficient incentive to do so, there is no way for Russia to refinance the rebuilding of their manufacturing sector.

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    How would we go about doing that? What would we do? How would we help enable them to do that?

    Mr. BUSH. I think provide Western banks with a level playing ground, to tighten up on corporate governance, to tighten up on the bankruptcy legislation which is presently inactive. I think there is a movement toward letting Western banks in; not only was Mr. Primakov mentioning it, but also even the Central Bank chairman has also finally admitted that they need to let Western banks in. But they have to improve the environment for these Western banks.

    Mr. BACHUS. And you mentioned bankruptcy reform or the passage of bankruptcy legislation. That seems to be a consensus there, that needs to be done.

    Mr. BUSH. Very much. There are thousands of value-subtracting enterprises. The problem is, they are in the regions, and in many towns and cities there is only one big factory. The Soviet system went in for economies of scale, and you have many plants with 50,000 or 100,000 workers. In many cases, these factories represent not only the sole source of employment for the people in that city or town, but they also provide schools, canteens, housing. So if they were to close, then the whole town would die.

    The next town might well be several hundred miles away. That is why the regional authorities, the governors and the mayors, are very much against making these enterprises go bankrupt. In the meantime, they are subtracting value. They are devouring a lot of subsidies.

    Mr. BACHUS. Mr. Kramer, do you have any comments of what we should be doing that we are not doing?
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    Mr. KRAMER. The IMF, as one of its conditions for the new package, has said that the Duma, the Russian lower house of parliament, must pass banking reform legislation. That is one of the few conditions I actually support in the IMF package.

    Mr. BACHUS. You are saying banking reform?

    Mr. KRAMER. Banking reform. Bank bankruptcy reform. That too is an issue.

    Dr. COHEN. Mr. Bachus, if you would permit me, I would like to draw your attention to the fact that many of the so-called conditionalities of the IMF, the conditions that were put in place specifically for Russia to perform and, in the meantime, the IMF would provide the loans, were not performed by the Russian government under much more vigorous pro-reform leadership of Mr. Chubais, Mr. Gaidar, et cetera.

    I believe that you have to get to a point where the Russian legislature and the government put these reforms in place, the economic performance is improved because these are basically the elements of the macro-economic structure of the Russian economy, or the Russian Federation.

    On the micro-economic level, corporate governance need to be more vigorously enforced, corporate governance need to be more transparent. And then and only then, sir, any kind of future investment in that place will make sense. Investors have the ability to evaluate projects, to evaluate firms, and they will invest there when they can make money. They can make money only when all of these macro-economic issues and corporate governance issues will be addressed.
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    Mr. BACHUS. Banking reform, I suppose, would also address the problem that has been raised that this is a mattress economy and there is $30 billion stored in mattresses and socks all over Russia.

    Dr. COHEN. Maybe more than that, sir.

    Mr. BACHUS. And banking reform would obviously——

    Mr. PRICE. It would certainly help. The efforts right now in the restructuring of the banking industry are going forward, I think seriously. I was in St. Petersburg last week for a banking conference organized by the Central Bank of Russia, and it struck me that there is, on the part of staff and on the part of some Duma members, your counterparts, who were at the meeting, as well as the bankers present, that there is more of a sense of conviction that they have more fire in their belly about doing this and they are going to try some amendments to the bank restructuring law, I think this week, hopefully giving the RTC equivalent, like the Resolution Trust Corporation, more of a handle on the process.

    For instance, now they can't get ahold of the stock fully. The owners still can kibitz with them in the course of the restructuring and creditors, for example, Congressman, you know, people to whom there is indebtedness, they have the ability to demand their entire amount of indebtedness. They can't take on a prorated basis or something like that.

    So there are just these issues which don't yet allow a cleaning up of the industry, and that is a prerequisite.
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    Mr. BACHUS. I remember a year ago discussing some of these same things. Now they need unanimous consent of all creditors, unanimous consent of all shareholders in certain cases, and that that—other than banking reform—and I say that not to underestimate it, because as you say, Mr. Bush, their manufacturing system is very antiquated with the exception of, you listed three areas—military hardware, nuclear power plants and space engineering. Obviously, if one needed to be antiquated, I would have hoped it would be military hardware, so that is not even good news that that is state of the art.

    But then they are going to have to have a stable financial base with which to build their manufacturing back up.

    I notice that Mr. Ryan mentioned his program to sell tractors to Russia. Obviously, that is good for United States industry and it is good for our export industry, but now there is probably—before Russia, there are better things than us making their tractors and shipping them to them, although we certainly don't want to discourage that.

    Is there anything other than banking reform and bankruptcy reform that you would highlight as something that definitely should be a condition?

    Mr. PRICE. Could I jump in? As the bankers, absolutely. I am here for a much wider group of folks than just the banking industry, the U.S.-Russia Business Council.

    The whole question of corporate governance, which has been mentioned, the whole question of minority shareholders' rights and the fact that Western shareholders were being squeezed out of positions, or renegotiated once they thought they had positions, these are all ultimately essential.
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    I have to say, again as a banker, that to me, the equity flows are going to be the crucial issue, and to bring back the flight capital, as I mentioned. You are not going to get more lending, frankly, from the West into this country until you have a stabilized flow of equity investment, and both flags, both Russian equity and Western equity, coming in on the same footing.

    Mr. BACHUS. I think someone made the comment that the Duma is made up largely of Communist nationals. Is that an accurate observation?

    Mr. BUSH. Roughly 220 out of 450 are Communists, agrarians, and their close allies.

    Mr. BACHUS. Other than——

    Mr. PRICE. Some of those are more moralists than others.

    Dr. COHEN. Some of them advocate the recapturing of Alaska, and Senator Stevens is not here, but he would like that. It is almost clownish, but they do talk like that.

    I would like to mention the issue of the rule of law and the existence of dispute resolution, whether the courts or the arbitration fora, is very important. Even when the laws exist in Russia, even when you get to the court, either the laws are applied incompetently or the judges are bribed.
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    Sometimes the judges are not paid for months, are not paid for supplies and electricity. You cannot conduct justice in a situation like that, and when you have a judgment, you cannot enforce it. As long as you cannot enforce judgments through the court system or the arbitral award, it will be organized crime who will go and shoot somebody's kneecaps out, and that is what is going on in Russia.

    In conditions like that, if I was an investor, I would not go there, and that is an extremely important aspect of creating that climate, that both the Russians and the Westerners will invest.

    Mr. BACHUS. One thing that is also a problem is their tax system and their need for tax reform. I would have to say that it gives me quite a bit of uneasiness for us to dictate their tax policies, and I think that can be turned around. It is like a loaded gun, and they can go to the people and say, ''Americans want us to raise taxes. This is an American tax.'' So I am not sure that ought to be a condition, although obviously it is a problem.

    Mr. BUSH. They are aware that their tax burden is excessive—you could pay more than your entire revenues. They realize this is crazy; they realize this is why people don't pay their taxes, so they have been calling for a simplification of the code from over 80 taxes down to 20 or so.

    Mr. BACHUS. Foreign investment remodeling, a lot of those things would assist them with tax reform too.
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    Mr. KRAMER. Can I also just add, the IMF I think has made a huge mistake in stressing revenues and largely with high taxes. The IMF has pressed on the Russian government and the Russian Duma not to implement a cut in the value-added tax from 20 percent to 15 percent and has asked the Duma and the government to postpone that until next year. The reason they claim for the postponement is because it is Russia's biggest and best tax earner.

    The problem is, as Keith Bush has mentioned, taxes in Russia are tremendously burdensome, and what Russians need is tax relief, not maintenance of the current tax system.

    I would also add to what Mr. Price said, production-sharing agreements are also needed and need to be abided by by both Russian enterprises and the Russian government. There is a reason foreign investment is not as high in Russia compared to China; the reason for that is that the climate in Russia is not a good place to do business. Foreign investment is down to $2.2 billion in 1997, from $6.2 billion in 1997. The reason for that is, it is a lousy place to do business.

    Until Russia makes it a better place to do business, I, with all due respect to Mr. Ryan, would not support artificial incentives through Eximbank in trying to promote business there. When Russia is a good place to do business, American companies, Western companies will go in there in a heartbeat.

    Mr. BUSH. Russian capital flight, which is probably in excess of $100 billion, will also return.
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    Mr. BACHUS. I appreciate it. I think you have given us an easy-to-understand checklist of reforms that need to be made in Russia that are in their best interests and would be an advantage to them and things that they can do themselves that don't require our financial assistance. And like you say, increasing taxes in an inefficient system, you increase them; they are already avoiding taxes, so the higher they go, the more avoidance there is, and that is probably the problem now is the higher rates.

    Mr. KRAMER. If I could add, sir, that not only is the problem on an individual and a corporate basis where people are not complying with the tax laws, but regions are reluctant to send what they are supposed to to the central government for fear—and I think rightly so—that the money will be either lost or misused.

    Dr. COHEN. The only ones—and I have vast experience in Russia on the ground—the only ones who are really trying to pay the taxes are the Western firms, and even they do not want to pay when they have to pay more than 100 percent of the profit.

    Now, Russia collects less than 10 percent of its small GDP in taxes, whereas we collect, with much lower rates, over 20 percent of our GDP in taxes. The Heritage Foundation still believes it is too high, but the American system is much more effective on the rate basis, much more efficient than the Russian system in terms of tax collection.

    Mr. BACHUS. Mr. Chairman, one of the questions given to me to ask was, ''what will happen in Russia over the next six months?'', but after reading Mr. Bush's paper and reading his quote where he says, ''Anyone who tries to forecast what will happen next in Russia is an idiot''—I won't ask that question.
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    Mr. BUSH. Mr. Chairman, could I add one thing which was omitted, because I shortened my presentation. That is the question of the debt owed to Russia by the Third World. They owe on paper some $102 billion. The Paris Club and London Club will be looking at whether they should forgive some of the Russian debt, which is $103 billion.

    One of the preconditions must be, I suggest, that Russia will be asked to forgive the debt owed to it. It is still trying to collect from nations like Cuba, Mongolia, Afghanistan, Mozambique, Iraq, and Vietnam—countries which cannot pay anyhow. We should tell the Russians that they should be asked to forgive Third World debt.

    Chairman LEACH. Let me just make one minor observation. If you have a tax system of high rates and low compliance, that becomes discriminatory against foreign firms, because a foreign firm would be more likely to want to pay at the full rate, and that is an oddity. So I think the thesis of lowering rates and seeking compliance with lower rates is the consensus thesis; it was reflected by Secretary Truman in his opening statement today. Is that the consensus of the panel?

    Mr. KRAMER. Yes.

    Mr. BUSH. Yes.

    Dr. COHEN. Yes.

    Mr. PRICE. Yes.
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    Chairman LEACH. Thank you very much. I think if there is anything that I take out of this hearing to a little greater extent is the observation toward the end that we have put an awful lot of attention in recent months on WTO and China, and it could well be that WTO and Russia ought to be raised to a higher level of national interest and that the financial component should be the principal linchpin component of our considerations toward Russia as, frankly, I think they should be toward China, too.

    I don't know of anything more counterproductive in China than their restraints on financial institutions of all kinds. Nothing would be better for China than to open up, as I am sure would be the case with Russia.

    Just maybe, John, you ought to take to your bank the notion that out of the national interest, you might make an exception in your wholesale bank orientation.

    Mr. PRICE. I will raise it with the proper authorities.

    Chairman LEACH. Fair enough.

    Well, let me thank you all, and each of you has presented a different, but, I think, non-contradictory perspective that I think is very helpful to you and all of us. Thank you.

    The hearing is adjourned.

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    [Whereupon, at 2:10 p.m., the hearing was adjourned.]