SPEAKERS CONTENTS INSERTS
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THE U.S. AND RUSSIA: ASSESSING THE RELATIONSHIP
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
JULY 16, 1998
Printed for the use of the Committee on International Relations
COMMITTEE ON INTERNATIONAL RELATIONS
BENJAMIN A. GILMAN, New York, Chairman
WILLIAM GOODLING, Pennsylvania
JAMES A. LEACH, Iowa
HENRY J. HYDE, Illinois
Page 2 PREV PAGE TOP OF DOCDOUG BEREUTER, Nebraska
CHRISTOPHER SMITH, New Jersey
DAN BURTON, Indiana
ELTON GALLEGLY, California
ILEANA ROS-LEHTINEN, Florida
CASS BALLENGER, North Carolina
DANA ROHRABACHER, California
DONALD A. MANZULLO, Illinois
EDWARD R. ROYCE, California
PETER T. KING, New York
JAY KIM, California
STEVEN J. CHABOT, Ohio
MARSHALL ''MARK'' SANFORD, South Carolina
MATT SALMON, Arizona
AMO HOUGHTON, New York
TOM CAMPBELL, California
JON FOX, Pennsylvania
JOHN McHUGH, New York
LINDSEY GRAHAM, South Carolina
ROY BLUNT, Missouri
KEVIN BRADY, Texas
RICHARD BURR, North Carolina
LEE HAMILTON, Indiana
SAM GEJDENSON, Connecticut
TOM LANTOS, California
Page 3 PREV PAGE TOP OF DOCHOWARD BERMAN, California
GARY ACKERMAN, New York
ENI F.H. FALEOMAVAEGA, American Samoa
MATTHEW G. MARTINEZ, California
DONALD M. PAYNE, New Jersey
ROBERT ANDREWS, New Jersey
ROBERT MENENDEZ, New Jersey
SHERROD BROWN, Ohio
CYNTHIA A. McKINNEY, Georgia
ALCEE L. HASTINGS, Florida
PAT DANNER, Missouri
EARL HILLIARD, Alabama
BRAD SHERMAN, California
ROBERT WEXLER, Florida
STEVE ROTHMAN, New Jersey
BOB CLEMENT, Tennessee
BILL LUTHER, Minnesota
JIM DAVIS, Florida
LOIS CAPPS, California
RICHARD J. GARON, Chief of Staff
MICHAEL H. VAN DUSEN, Democratic Chief of Staff
MARK C. GAGE, Professional Staff Member
ALLISON K. KIERNAN, Staff Associate
C O N T E N T S
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The Honorable Stephen Sestanovich, Ambassador-at-Large, Office of the Special Adviser to the Secretary of State for the New Independent States, Department of State
Lt. General William Odom, Director of National Security Studies, The Nixon Center
Mr. Peter Rodman, Director of National Security Studies, The Nixon Center
Dr. Leon. Aron, Resident Fellow, The American Enterprise Institute
Mr. Paul Goble, Director of Communications Division, Radio Free Europe-Radio Liberty
Dr. Clifford Gaddy, Fellow, The Brookings Institution
The Honorable Benjamin A. Gilman, a Representative in Congress from New York, and Chairman, Committee on International Relations
Ambassador Stephen Sestanovich
Lt. General William Odom
Mr. Peter Rodman
Dr. Leon Aron
Mr. Paul Goble
Dr. Clifford Gaddy
Additional responses to questions submitted
THE U.S. AND RUSSIA: ASSESSING THE RELATIONSHIP
THURSDAY, JULY 16, 1998
Page 5 PREV PAGE TOP OF DOCHouse of Representatives
Committee on International Relations,
The Committee met, pursuant to notice, at 10:02 a.m., in room 2172, Rayburn House Office Building, Hon. Benjamin Gilman (chairman of the Committee) presiding.
Chairman. GILMAN. The Committee will come to order.
Good morning, ladies and gentlemen. This morning our Committee on International Relations will take testimony from several expert witnesses on the state of relations between our nation and Russia. The formal title of our hearing is ''The United States and Russia: Assessing the Relationship.''
Frankly, the relationship between our nation and Russia is a multi-faceted one. It is therefore difficult to envision that any single hearing or even a series of hearings could fully assess the state of our complex relationship with Russia in this new post-cold war world. I do believe, however, that we can make a fair assessment as to whether our policies toward Russia are serving America's interests.
Indeed, I hope that the Members of this Committee and of the Congress will have a better idea whether American interests are being served by our current policies toward Russia as a result of this hearing. It's my strong impression that within the Congress, there is a growing concern that, regrettably, our current policies toward Russia are not achieving the kind of objectives we've supported and have sought. Rather than economic stability and democratic progress in Russia, we've seen an economy close to collapse and a government and a society marred in corruption. We hear a growing chorus of complaints that democratic practices have yet to truly take hold.
We observe a Russia that could literally descend into social chaos as government funds intended to pay workers simply disappear into thin air, leaving those workers little choice but to block railways; threaten to leave nuclear reactors unattended; and mount protests demanding that somebody do something to help them. We also hear reports that average Russians are now repeating Nationalist and Communist claims that their economic suffering is all the fault of our nation. Astonishing claims to hearsince the United States and other nations have committed so much assistance to Russia in so many ways over the last few years and stand poised to provide a new $23 billion bailout of the Russian Government. Many Americans note, with concern, the ever more frequent reports of Russian commerce in advanced arms and military technology with countries like China and Iran.
Page 6 PREV PAGE TOP OF DOC There are continuing allegations from those states bordering Russia that the Russian Government is in the business of undermining their new sovereignty, sometimes involving the promotion of divisive ethnic conflict and at other times involving economic coercion. There's also a strong concern in the Congress over the Russian Government's willingness to support financially the dictatorship of Alexander Lukashinko in Belarus, at the very time that Russia is turning to the democratic nations of the world to help save it from its own fiscal collapse.
There are distressing reports that corrupt or criminal individuals have entry at high levels in official Moscow and that the tremendous amounts of money being spearheaded out of Russia by their activities may ultimately serve nefarious enterprises in our nation and elsewhere.
With regard to arms control agreements, Russia either demands revisions in its favor in existing treaties, or refuses to ratify agreements, such as the START II Treaty that is already signed.
Today, I'm certain that our Members will want to address specific questions to our witnesses. Perhaps, however, we should also consider three basic questions.
First, as I've noted, are our policies toward Russia adequately serving American interests? If not, what assumptions underlying those policies are mistaken and need to be revisited if we're to get our relationship with Russia, and reforms in Russia, back on track?
Finally, if we provide another $23 billion in taxpayer-supported loans to Russia in the next few days, will it turn things around in Russia? Or will we simply be faced with fiscal collapse in Moscow once again in the near future?
Ladies and gentlemen, we have a fine roster of witnesses this morning. Appearing first will be our State Department's Ambassador-at-Large for the New Independent States, Ambassador Steve Sestanovich. Welcome back to our Committee, Mr. Ambassador. Appearing on a large second panel after our good ambassador will be Lt. Gen. William Odom, U.S. Army Retired, Director of National Security Programs at The Hudson Institute; Mr. Peter Rodman, Director of National Security Programs at the Nixon Center; Dr. Leon Aron, Resident Fellow of The American Enterprise Institute; Mr. Paul Goble of Radio Free Europe-Radio Liberty; and Dr. Clifford Gaddy, Fellow at the Brookings Institution's Foreign Policy Studies Program. Welcome, gentlemen, and thank you for appearing before our Committee this morning. Before we begin our testimony, I'd like to ask our Ranking Minority Member, Mr. Hamilton, if he'd like to make any opening remarks.
Page 7 PREV PAGE TOP OF DOC Mr. HAMILTON. Mr. Chairman, I do and I thank you. I certainly commend you for calling these hearingsit's an important hearing. I think all of us recognize that the United States has a very strong national interest in the success of Russian reform. Russia possesses thousands of nuclear warheads that can reach the United States. It's a member of the Security Council with veto power. It can promote or undermine international cooperation in a lot of different areas. It's a very resource-rich country that contributes to or can become a massive drain on the global economy.
I think it is important to assess some of the positive developments that have taken place in Russia. Democratic elections have been held on the national, the regional, and local levels. The Russian Government has cut inflation dramatically and over 70 percent of its GDP is now produced in the private sector. It has become, as a country, increasingly integrated in the international institutions. It belongs to the G8, the Council of Europe, the Paris and London Clubs, and it's working to join the WTO. It ended the war with Chechnya. It seems to have learned that lessons of federalism cannot be settled by force.
On foreign policy, Russia has pulled its troops out of Germany, Eastern Europe, and the Baltic states. Their troops work alongside NATO troops everyday in Bosnia. They have accepted NATO enlargementalthough they're not enthusiastic about it, and they've signed the NATO-Russia Founding Act. Its policies toward its neighbors, while sometimes troubling, have been peaceful. Russian-Ukrainian relations have been calm. Russia has not exploited the issue of ethnic Russians in neighboring states. It has participated actively in the Nunn-Lugar program to dismantle nuclear weapons. It has met its obligations under the START I Treaty and is increasing its cooperation with us on non-proliferation, as the morning headlines made clear.
But I think all of us would acknowledge Russian reform has occurred slowly in fits and starts. In both foreign and domestic policy, the government often continues to pursue policies which we do not like and we oppose. Key reform, such as overhauling the tax code and breaking up monopolies, have not occurred. As the Chairman said, corruption is widespread. On foreign policy, Russia continually challenges what it perceives as U.S. predominance. Its policies toward Iran, Iraq, and Kosovo cause a lot of concern. The Duma has not yet ratified START II.
Page 8 PREV PAGE TOP OF DOC So what do we do? I think we need to view Russia more accurately. There are some still who see Russia through the prism of the cold war. They see Russia as an implacable enemy. In my view, they miss the reality of today's Russia. Russia's economy is one-tenth the size of our own. Its military spending is about 15 percent of what it was a decade ago. Russia's central government today is weak. It cannot carry out the critical functions of government. Its total revenues are $50 billion. In other words, they bring in in a year what the United States spends in 12 days. It is desperately short of cash and it cannot pay wages on time.
Others miss the reality of today's Russia by viewing Russia as a close partner, as a member in good standing of the league of Western democracies. We hope, of course, that Russia will become that. But Russia is not there yet. Russia should be seen as a work-in-progress. We should not walk away from this relationship. It is easy to let the relationship deteriorate toward a mutual alienation. We do that with an endless line of complaints about Russia's bad conduct. When we disagree with Russia, we need to state strongly our objections and draw clear red lines, if necessary, especially on foreign policy issues. But we need to keep working to narrow our differences. We need to avoid the tendency to zero-in on one, or even several, objectionable Russian policies and allow them to overwhelm the entire relationship. If we let that happen, our relationship will deteriorate and our interests will suffer.
We need a vision of what we want Russia to become. We want Russia to develop a society based on the rule of law. We want it to become a prosperous market economy and a member of good standing in the international community. We're far away from achieving that vision now. But the purpose of our policy should be to encourage reform and reformers and to push Russia in that direction.
I believe the Administration's policies have supported reform in Russia. I commend them for it, but there's no substitute for strong U.S. engagement to advance our interests, especially in the run-up to the September summit meeting. The Administration needs to speak out, articulate, and defend its policy on Russia. To the best of my memory, Mr. Ambassador, the last major speech on Russia was by then-Secretary Christopher in Bloomington, Indiana in March 1995. From my point of view, it was a very good speech, but it was a very long time ago. The President needs to step forward and to articulate U.S. policy toward Russia.
Page 9 PREV PAGE TOP OF DOC In conclusion, the key policy question before us is the new IMF loan packageI support it. No one can view this bailout as a desirable development. Some causes of the current crisis are, of course, beyond Russia's controlincluding the drop in oil prices and the fall-out from the instability in Asia. But the Russian Government's failure to implement far-reaching fiscal and structural reform has now brought it to the brink of disaster. All of us understand that the Russian Government must help itself by controlling its budget and extending the rule of law, and that the IMF must impose tough conditionality on Russia.
Destabilization in Russia would have a negative impact across the world. Success is surely not guaranteed even if the IMF package receives approval. But I think the risks are grave if the loans do not move forwarddevaluation, economic chaos, and even a possible coup and the rise of a hostile government. We risk the defeat of democratic and market reform and are returned to a Russia that opposes Western values. What is ultimately at stake here is the future of democracy, the market economy, the rule of law, and an open society in Russia. The stakes are simply huge and the interest of the United States in the outcome unsurpassed.
Russia's current government is the most reform-minded one that nation has had in many years. That government is now pressing hard for reforms and yesterday, of course, the Duma took some steps with some new laws that move in the right direction. We need to give that government a chancegive it time to make the reforms work. I believe the loan package will provide us that chance.
I welcome all of the witnesses today, including the Ambassador. I look forward to their testimony.
Chairman. GILMAN. Thank you, Mr. Hamilton. Mr. Smith.
Mr. SMITH. Thank you very much, Mr. Chairman. Mr. Chairman, thank you for holding this important hearing on U.S.-Russia relations. I'm sure that the testimony provided by our distinguished witness, Ambassador Sestanovich, will be timely and informative. I applaud you for Panel 2 that's made of experts that will give us, I think, some very good insights.
Page 10 PREV PAGE TOP OF DOC Mr. Chairman, I have to say that I'm deeply concerned about the Administration's policy toward Russia. Especially as I read about the Administration's latest efforts through the IMF to rescue the Russian economy. There is a real sense of deja vu here. How many times has the Administration told us that the Russian economy appears to be on the upswing? Yet the American taxpayer is getting hit once again for another bailout. Every time Russia faces economic difficulties, we are warned that if the West doesn't send money, the fascists and nationalists will take over.
Reporting on Russia this week, The Economist states there is an atmosphere of chaos and trepidation that gives hope to both extremes of the political spectrum. Obviously, I don't wishnor does anybody on the House or Senate sideto see the fascists and the nationalists take over. But I'm not sure the fascists and the nationalists could have done much worse to the Chechnyan people than the Yeltsin Administration. Where's the money going? It is an unfortunate fact that much of the Russian ruling class has created a kleptocracy masquerading as a democracy.
For instance, a few months ago, Russia's top order there visited the United States and stated that around $2 billion had inexplicably disappeared from the Russian Central Bank currency reserves. In April of this year, the Russian interior ministry reported that billions of dollarsmuch of it embezzledleaves Russia illegally every year. Whatever the sum, that money could have gone a long way toward paying Russian coal miners, factory workers, school teachers, and countless other Russians who haven't seen their paychecks for months.
In this connection, Mr. Chairman, the American Foreign Policy Council recently issued a detailed list of Russian military modernization programs which includes such projects as the commissioning of a new aircraft carrier; a nuclear cruiser; construction of a new submarine launched ballistic missile; deployment of new ICBMs; and so on. Meanwhile the Chief of the Defense Ministry's food service submitted his resignation last week over a Moscow press report that some Russian soldiers are being fed dog food.
Page 11 PREV PAGE TOP OF DOC How do we know that the Western aid is not being used, either directly or indirectly, to build up the Russian military industrial complex once again at the expense of the average Russian and the American taxpayer? Moreover, Mr. Chairman, I also share the concern that you have so clearly and eloquently expressed regarding Russia's foreign policy. Certainly, Russia has a legitimate foreign policy and commercial interest, but this should not include continually harassing Latvia for its treatment of ethnic Russians, although there have been some missteps. Nor should Russia put such heavy-handed pressure against Azerbaijan and Georgia to enhance Russia's geopolitical position in the southern caucuses. Nor should Russia further the nuclear capabilities of nations, whose behavior is clearly inconsistent with international norms.
Mr. Chairman, I realize that there are many areas where our leverage on Russia is limited. I realize that there are many areas where Moscow's leverage on its own reachings in the federation is limited. However, I believe that the Administration must be much more candid with Russia about its foreign policy tactics and its economic situation. I realize that the Yeltsin Administration and apparently the Duma are now saying that they are serious about economic reforms. But frankly, I fear that the chief benefactors of the latest IMF bailout will be the oligarchy that runs Russia, along with their Swiss bankers and real estate agents in Cyprus. However, I remain optimistic at all times and hopefully there will be a turn for the better. Again, our witnesses hopefully can offer some insights.
Chairman. GILMAN. Thank you, Mr. Smith.
We ask all of our witnesses to consider submitting their written testimony for the record and summarizing their testimony since we have a number of witnesses. We'll be pleased to make the entire testimony part of the record.
Ambassador Steven Sestanovich assumed the position of Ambassador-at-Large and Special Advisor to the Secretary of State and the New Independent States in September of last year. As principal advisor to the Secretary, our New Independent States Ambassador Sestanovich is responsible for the overall coordination of U.S. relations with and assistance to the NIS of the former Soviet Union; coordination of policy towards the NIS, both within the department and with other government entities; and serves as the principle spokesman for the Administration and the Department of State, before Congress and the public on policy toward the New Independent States. Ambassador Sestanovich, you may proceed.
Page 12 PREV PAGE TOP OF DOCSTATEMENT OF STEPHEN SESTANOVICH, AMBASSADOR-AT-LARGE, OFFICE OF THE SPECIAL ADVISER TO THE SECRETARY OF STATE FOR THE NEW INDEPENDENT STATES, DEPARTMENT OF STATE
Ambassador SESTANOVICH. Thank you, Mr. Chairman. I appreciate the opportunity to discuss U.S.-Russian relations with you today. It's a pleasure to be here. I'd like to make some brief remarks and would ask that my full statement be entered into the record.
Chairman. GILMAN. Without objection.
Ambassador SESTANOVICH. Mr. Chairman, Congressman Hamilton, the timing of your hearing could hardly be better. As you know, President Clinton will travel to Moscow to meet with Boris Yeltsin. His trip takes place at a moment of increased uncertainty, as you've noted, about where Russia is headed. The financial crisis, in particular, has highlighted the structural weaknesses of Russia's economy and led to concern about the country's political stability, as well.
These developments raise understandable questions about American policy toward Russiayou've raised some of them today. They oblige the Administration and Members of Congress to take a hard look at our policy and the assumptions that underlie them. I hope that in our discussion today, we can clarify what's at stake, what we should be trying to achieve, what stands in our way, and what we must do to succeed.
Let me start with a question that will occur to anyone who has read of this week's multi-billion dollar IMF loan package for Russia. Why should Americans care about this middle-sized underachieving economy? The answer is that history, geography, military technology, the vulnerability of its smaller neighbors, and other factors give Russia a central place in international issues of great consequence to the United States. There's nothing abstract about the way in which Russia matters to us. Transfers in military technology from Russia to Iran affect the balance of power in the Persian Gulf and the Middle East.
Page 13 PREV PAGE TOP OF DOC START II ratification will increase our security and move us toward sharply reduced stockpiles of nuclear weapons. Russia's relations with other states of the former Soviet Union may decide whether the Europe of the 21st century is a peaceful place or not. More still is at stake. Oilmen will tell you that Russia's resources will shape future world energy supplies. Telecommunications firms will tell you they can't create the global satellite network they want without Russian launch capabilities. Software companies will tell you they're eager to work with Russia's brainy computer works.
We have a policy that reflects the diversity and magnitude of these interests. In relations with Russia, this Administration aims to first reduce the threat to the United States and to international peace posed by weapons of mass destruction.
Second, support Russia's transition to a market economy.
Third, work with Russia's new generation of Democrats as they build a society in which human rights, including religious freedom are protected. Fourth, ensure that Russia deals cooperatively with its neighbors and is integrated into Euro-Atlantic and global institutions.
Mr. Chairman, we clearly won't attain any of these goals unless our relations with Russia are a two-way streetunless these are Russia's goals too. Making sure this is so is a formidable challenge. It's not made easier by the fact that Russians are divided on so many of the issues that matter to ussuch as START II, Iran, religious freedom, and economic reform, to name just a few. Add to this the fact that the Russian political system is still very much a work-in-progress with the authority of many of its institutions still being defined. The result is a mechanism that produces policy resultsgood, bad, or indifferentonly very slowly.
All this means that dealing with Russia is difficult. But it's hardly hopeless. Its new government is like none that we have ever seen in Russia. Its leaders represent a true post-Soviet generation. Those who have come to Moscow from positions of regional leadership have first-hand knowledge of what's needed to improve the lives of ordinary Russians. They know that what ordinary Russians care about is their government's ability to collect taxes fairly, provide services efficiently, and put the economy on a growth track. This government understands that in democracy, voters reward bottomline resultsnot empty promises.
Page 14 PREV PAGE TOP OF DOC Mr. Chairman, despite the slow, often tortuous, process of getting policy results out of the Russian system, we continue to work as hard as we can to get results that advance American interests. The stakes are too high for us to accept second best. Ours is the same approach the Administration followed when it worked for the withdrawal of Russian troops from the Baltic states; when it concluded a trilateral U.S.-Russian-Ukraine agreement to remove nuclear weapons from Ukraine; when it completed the NATO-Russia Founding Act; when it stood firm for freedom of conscience in Russia; when it supported Russian reformers in their successful battle against inflation; or frankly, when it stood with them against a Communist resurgence.
It was said of every single one of these efforts that it could not succeed. It could not have succeeded without persistence, patience, and a clear recognition of America's long-term interests. We chose to do what we did because the alternative was unacceptable. A different approach would only have lessened the chances of getting what we wanted.
Mr. Chairman, there's no doubt that the bipartisan consensus that supported American policy toward Russia after 1991 is today under severe stress. You've made this point yourself. Congressional votes on sanctions legislation and tough questioning of IMF support for Moscow make that perfectly clear. Some in the Congress ask whether our goals are really attainable. The Administration's answer to that question is an emphatic yes. I believe nothing argues more strongly for our policy than the results we're seeing this week in two crucial areasRussian financial crisis and the flow of military technology to Iran.
Let me start with the economy. Three days ago, the IMF and Russia announced an agreement on a package of new lending designed to extricate Russia from an acute crisis that threatens a massive devaluation and financial collapse. The fund is prepared to make available to Russia this year $12.5 billion as part of a broader, multi-lender package for 1998 and 1999 worth $22.6 billion. But the IMF does so only on the basis that the Russian Government's commitments to undertake the most significant steps in years to put its finances in order and open up the economy.
Page 15 PREV PAGE TOP OF DOC The United States has offered strong support for this packageboth for the resources made available and for the terms attached to them. Our view is that the consequences of not acting would have been and remain very grave. A ruble devaluation would raise food prices for tens of millions of Russians. Inflation, the control of which has been the government's main achievement, would again plague Russia. Devaluation would engulf the banking system, freeze economic reforms, and risk a spillover of market instability to Ukraine, the Baltic states, and even East Central Europe. There would be political consequences on the same scale. All of this would happen without resolving the structural problems of the Russian economy.
What brought Russia to this crisis? A combination of international and homegrown factors. Internationally, Russia has been greatly affected by the Asian flu and falling oil prices which have cut Russian export earnings by 15 percent in the past year. At home, it's Russia's failure to create a viable fiscal system. The government became increasingly dependent on international capital at higher and higher, ultimately unsustainable interest rates. The IMF package gives Russia a chance to climb out of this crisisbut only if it takes the steps necessary to turn this short-term breather into a long-term turnaround. If we are to help, Russia must act. As I said earlier, our relations must be a two-way street.
Mr. Chairman, we strongly support the IMF package, but we aren't surprised that it's being scrutinized so closely. It should be. Funds on this scale must be used in a manner that advances clear and definable American interests. We believe this package meets that test.
Let me turn to a second issue that has preoccupied both the Administration and the Congressthe flow of sensitive technology from Russia to Iran's missile program. During the past 18 months, we've worked hard on this problem. Our objective has been to see Russian Government policies embodied in an effective export control system that actually prevents the transfer of illicit goods and technology into the wrong hands.
Since January, the Russian Government has taken a number of steps to deal with this problem. With the publication of new export control regulations in May, Russia had, in fact, created a system that on paper at leastis much like our own and that of other Western countries. The key, of course, is making it work. Yesterday, the Russian Government announced that it has launched special investigations of nine companieswhich it named. They're suspected of cooperating with foreign programs to acquire weapons of mass destruction and missile delivery systems. The investigations involve potential administrative and criminal actions against these entities.
Page 16 PREV PAGE TOP OF DOC For our part, we plan to suspend any U.S. Government assistance programs to these Russian companies. We will use existing legal authority to restrict trade between them and the United States. The Administration's approach to this problem is working. Our goal has not been simply to make a statement or to express outrage, but to get the job done. That means finding ways of getting the Russian Government to cooperate with us, to take the problem seriously, and to act. That's why the Administration has resisted the sanctions that Congress has sought to impose. The sanctions in the Iran Missile Proliferation Act of 1998 will not prevent Iran and others from seeking missile technologies. Nor will they remove the temptations for cash-starved companies and individuals to do business with Iran. But they will put the cooperation we need at risk. Only an effective and fully implemented Russian export control regime can solve this problem. Yesterday's announcement by the Russian Government and by this Administration show that our efforts are beginning to pay off.
Today, I've discussed the challenges, difficulties, and opportunities we encounter in dealing with a Russia that is still in the middle of an historic transformation. We can't say with utter certainty how this great drama will turn out. But to pass up the chance to influence how it unfolds would be worse than foolish. It would be an abdication of responsibility.
Mr. Chairman, we welcome debate and discussion of our approach to dealing with Russia, for we believe it meets what is at the end of the day the only serious test of policy. Whether the issue is economic reform or nonproliferation, or still other issues that I've discussed at length in my full statement such as religious liberty or building a peaceful Europe. Our policy is producing results that serve American national interests. Thank you. I look forward to your questions.
[The prepared statement of Ambassador Sestanovich appears in the appendix.]
Chairman. GILMAN. Thank you, Mr. Ambassador. We appreciate your review of our policies.
Page 17 PREV PAGE TOP OF DOC Mr. Ambassador, some of us in the United States are concerned that Russian President Yeltsin and Foreign Minister Primakov, when they call for a multi-polar world, are actually referring to a world in which our nation will find itself unable to organize international responses to urgent problems without providing concessions of some type to countries like Russia in return for their cooperation. Do you share that interpretation?
Ambassador SESTANOVICH. Mr. Chairman, I think the term ''multi-polar world'' at one level is merely a description of the reality of decentralized national politics. I think we can spend a lot of time trying to unpack it and understand what it means. Let's look, instead, at specifics because you've asked does it reduceor does it suggest a Russian policy that aims to keep us from organizing responses to urgent international problems? Look at some urgent international problems where we have been able to organize international responsesIndian-Pakistani nuclear tests; violence in Kosovo; peacekeeping in Bosnia; dealing with the challenge by Iraq's government to international inspections. In all those cases with different kinds of results, we have had to work with Russia and with our allies and other countries to formulate effective international responses. I think we've been able to do so.
Chairman. GILMAN. Well, just what do the Russian officials mean by the use of the phrase? What is their interpretation of that phrase?
Ambassador SESTANOVICH. They tend to elaborate on the unacceptability of one country telling all other countries what to do. It's a sort of nasty caricature of American policy. We don't find that particularly infecting our relationship, but we also don't spend much time thinking about the phrase itself. We're more interested in the specific policy problems that I've referred to.
Chairman. GILMAN. Mr. Ambassador, an article in the Baltimore Sun on May 26th stated that Russia's ambassador to the United Nations, Sergei Lavrov, spends his time trying to marshal opposition to our U.S. policies in the United Nations. Can you tell us why we should be rushing to support the bailout of the Russian Government in light of such reportsin light of Russia's recent rescue of Iraqi dictator, Saddam Hussein, just as the United States was trying to organize an effective U.N. response to his perceived obstruction of U.N. mandates? Are those reports, do you feel, unfounded? Tell us what your thoughts are about how Russia is acting in the United Nations.
Page 18 PREV PAGE TOP OF DOC Ambassador SESTANOVICH. Ambassador Lavrov is a tough negotiator. He's experienced at the United Nations. I'd rather look at our ability to deal with specific issues where they come before the U.N. Security Council where we need the cooperation of all of the permanent members in order to act effectively against serious problems of the kind that you mentioned.
We have had our frustrations in dealing with Russia in that process. But I think we have largely been able to meet the challenge that you mentioned which is preserving international unity against Saddam Hussein's efforts to shield programs that he may have for acquiring weapons of mass destruction. This is an issue where there is broad unity in the Security Council. While the process of getting to agreement among the permanent Members is never an easy one, we believe we're able to act effectively.
Chairman. GILMAN. One last question, Mr. Ambassador. Former Secretary of State, George Schultz, recently questioned the usefulness of a bailout of the Russian Government, in light of the massive and continuing flight of capital out of Russia. In Russia, several prominent officials, including Grigory Yablinsky, the head of the major reformist party in Russia, have warned that crony capitalism is rampant in Russia and could thwart any IMF-led bailout. I ask you, Mr. Ambassador, what is our government doing to halt the flight of capital out of Russia? What conditions have we placed on the Russian Government to make certain that Russian Government money, including IMF loans, doesn't simply disappear into foreign bank accounts?
Ambassador SESTANOVICH. Mr. Chairman, the most important condition that needs to be met in order to prevent the flood of capital out of Russia is the creation of a transparent financial system and the legal environment which creates investor confidence. Those are precisely the conditions that the IMF has been especially concerned that Russia meet before it disperses its money. There's a very legitimate concern here and a very real problem for Russia. The Russian Government understands that flight capital threatens its ability to create a viable fiscal system. They understand that they have to create a different, economic and legal environment that will reverse that problem. The kinds of conditions that the IMF has reached agreement on, by the Russian Government, will deal with that problem more effectively than has been done in the past.
Page 19 PREV PAGE TOP OF DOC Mr. Yablinsky has criticized crony capitalism with exceeding accuracy. The kind of environment that allows crony capitalism to flourish is the kind that is the target of IMF conditionality. They're looking to create a different playing field. I think those conditions are important.
Chairman. GILMAN. Thank you, Mr. Ambassador. Mr. Hamilton.
Mr. HAMILTON. Thank you, Mr. Chairman. Mr. Ambassador, on the IMF packagedo you think that package is going to lead toward fiscal and structural reform? Meaningful, strict structural and fiscal reform in Russia? You know, the problem has always beenand the skeptics, of course, say this is a band-aid, that structural reform has not occurred in Russia. Why should we think that it will occur now? This is a big package. There's a lot at stake. What assurance do we have that we're going to get real reform in Russia?
Ambassador SESTANOVICH. I think you raise a very legitimate question, Congressman Hamilton. I think it is answered in the following ways by what the IMF has tried to do.
First of all, an insistence on prior action. This is sometimes described as just throwing money at Russia in response to appeals. It's nothing of the sort. The Russians have agreed to a very strong list of prior actions that are the condition for getting even the first disbursements of funds. Second, continuing strong conditionality. There's a lot that they have to keep doing in order to get continuing disbursements. That's made possible by a third element, which is very strong monitoring.
Mr. HAMILTON. Your belief is that the top leadership of Russia today is firmly committed to implementation of the program?
Ambassador SESTANOVICH. Congressman, I believe they understand a number of things that had been made very clear to them over the past several months as they have gotten closer and closer to the abyss. It is absolutely clear that they cannot continue in the way that they have.
Page 20 PREV PAGE TOP OF DOC Mr. HAMILTON. But the success of this package is at the end of the day, going to be dependent on political will to carry it out.
Ambassador SESTANOVICH. Absolutely, and
Mr. HAMILTON. Do they have it?
Ambassador SESTANOVICH. Well, they havethey've been forced to face that test this week.
Mr. HAMILTON. You think they have it?
Ambassador SESTANOVICH. I think they have an opportunity to
Mr. HAMILTON. Oh.
Ambassador SESTANOVICH. act on the kind of unity that
Mr. HAMILTON. We know they'll have an opportunity.
I'm concerned about the political will. I just want your judgment.
Ambassador SESTANOVICH. Yes, and I
Mr. HAMILTON. Does this Administration believe that these Russian leaders now are committed to a tough, firm, strong program of implementation of structural and fiscal reform?
Ambassador SESTANOVICH. Let me say what I meant by opportunity, Congressman.
Mr. HAMILTON. OK.
Ambassador SESTANOVICH. It's in the sense of the famous expression, ''Nothing concentrates a man's mind like the prospect of hanging.'' They have looked into the abyss and they understand what they have to do. I think there will continue to be foot-dragging from people whose interests are threatened by this program. There's no doubt about it.
Page 21 PREV PAGE TOP OF DOC Mr. HAMILTON. OK.
Ambassador SESTANOVICH. There's going to be opposition
Mr. HAMILTON. OK, now you're dancing around me here. What I want to do is get an assessment from the Administration of your view toward the political will of the Russian leaders to carry out this package. Are they committed to it?
Ambassador SESTANOVICH. I think the Russian Government is committed to this package. They know that to make it work they have to get action by the Duma. The Duma is divided, but they are more receptive than we've ever seen them. You see that this week. If the Russian Government can succeed with the Duma, they've got a chance to make thisas I said to get a short-term breather.
Mr. HAMILTON. So on the executive side of the Russian Government, you think they've got the political will?
Ambassador SESTANOVICH. I'm sorry, did you say inside the Russian Government?
Mr. HAMILTON. No, I'm talking about the executiveyou're talking about trying to get the Duma to carry through. I'm interested
Ambassador SESTANOVICH. Yes.
Mr. HAMILTON. I know the problems in the Duma.
Ambassador SESTANOVICH. Yes.
Mr. HAMILTON. Is Kiriyenko committed to reform? Is Yeltsin committed to reform? Are they going to act? Are they going to push this thing through?
Ambassador SESTANOVICH. If they weren't, Congressman, I don't know why they agreed to the agreement that they've reached with
Mr. HAMILTON. They've agreed in the past and we haven't seen any reform come out of them.
Page 22 PREV PAGE TOP OF DOC Ambassador SESTANOVICH. No. As I said, this is an agreement that requires a lot of prior action. They don't just get
Mr. HAMILTON. OK. Do I understand that you're telling me that the Administration believes that Yeltsin, Kiriyenko, and the other top leaders here are committed to carrying out the structural fiscal reforms that the IMF envisions here?
Ambassador SESTANOVICH. Yes.
Mr. HAMILTON. OK. You made me work to get it.
Ambassador SESTANOVICH. I always do, Congressman.
Mr. HAMILTON. Is there any bilateral money, that is, any U.S. money in this package? I understand the IMF commitment
Ambassador SESTANOVICH. Yes.
Mr. HAMILTON. Japan is committed, but are there American taxpayer dollars in this package?
Ambassador SESTANOVICH. No.
Mr. HAMILTON. OK.
Ambassador SESTANOVICH. No. Part of the package involves a Russian Government effort to swap its short-term, high interest commitments for long-term lower interest ones. That will be done in private, capital markets.
Mr. HAMILTON. But I've seen the elements of the package. I know you have, too. There's no bilateral assistance from the United States to Russia
Ambassador SESTANOVICH. That's correct.
Mr. HAMILTON. In addition to this package or as part of the package.
Ambassador SESTANOVICH. That's right.
Page 23 PREV PAGE TOP OF DOC Mr. HAMILTON. Is that correct? Now if I may take up this second item. You know, we're scheduled to have the vote on the sanctions bill tomorrow. We all know how that vote is going to go in the House. But I'm just interested to hear, in your judgment, have the actions that have been taken so far stopped all or stopped a good part of the technology transfer from Russia to Iran? How would you assess that at this point?
Ambassador SESTANOVICH. We've
Mr. HAMILTON. Your basic argument is we've been cooperating with Russia, it's making progress, and we ought to continue that. OK, what have we achieved? And what have we not achieved?
Ambassador SESTANOVICH. Let me answer in a couple of ways. We've raised a number of cases where we considered technology was flowing to the Iranian missile programin more than a dozen cases. We think most of those are now quiet, so we achieved that result. The Russian Government, yesterday, announced a list of companies that its investigating publiclysent out a list. We think those are the right ones. Those are the ones that ought to be investigated. We're glad to see them publicly identified as a problem. We have this issue out in the open. In support of that action, we've done our own cutoff of contacts with those entities.
In addition, we have seen the creation of a Russian export control system.
Mr. HAMILTON. Yes. I'm familiar with that. But has all technology export stopped? Where are we at this point?
Ambassador SESTANOVICH. No, Congressman. The cases that the Russian Government identified yesterdaywe think are still problem cases. We're concerned about that.
Mr. HAMILTON. I know I've exceeded my time. But if you look at this thing over the last year or two, have we stopped 50 percent by cooperating with the Russians? Have we stopped 90 percent? Have we stopped 10 percent? How much of this technology transfer have we really stopped?
Page 24 PREV PAGE TOP OF DOC Ambassador SESTANOVICH. I can give you a better answer on that in closed session, Congressman.
Mr. HAMILTON. OK.
Ambassador SESTANOVICH. Let me say that of the cases we've raised, most of them are quiet.
Mr. HAMILTON. Thank you.
Chairman. GILMAN. Thank you, Mr. Hamilton. Mr. Rohrabacher.
Mr. ROHRABACHER. Hello, Steve.
Ambassador SESTANOVICH. Dana, how are you?
Mr. ROHRABACHER. Just to follow up on that Iranian question. Don't the Russians have a bunch of Iranian students learning missile technology in their universities? Isn't this is a policy of their government?
Ambassador SESTANOVICH. The policy of their government is to prohibit such training where it will contribute to exactly the results you and I are worried about. One of the entities on the list that the Russian Government announced for criminal investigation yesterday, Baltic State Technical University is an organization that would be about which we have questions of that kind. We have discussed that issue with the Russian Government and they have established a new mechanism for controlling the training of foreign students in areas of this kind.
Mr. ROHRABACHER. So if you are correct in your assessment that they're going to turn over a new leaf once we turn over the cashthat we would expect that those students would be going home. That right? So 6 months from now, you're going to be here and we're going to say did the Iranian students go home? You're going to say what?
Ambassador SESTANOVICH. I don't know whether I'll be able to tell you they've gone home. We certainly hope they're not going to be trained as missile specialists. I surely hope I can come back in 6 months and talk to you about that.
Page 25 PREV PAGE TOP OF DOC Mr. ROHRABACHER. Now, doesn't it make you a little suspicious that after all of this jaw-boning and all of the things that have been going on all these years now, that it was just yesterday that the Russians announced that they were going to take legal actions against these companies that were providing technology to hostile powers to the United States? I mean
Ambassador SESTANOVICH. These are companies that we've had under discussion with them for some time.
Mr. ROHRABACHER. Right, I understand that.
Ambassador SESTANOVICH. It's not just a question of
Mr. ROHRABACHER. That's the point of the question.
Ambassador SESTANOVICH. No, no, noand we have seen some prior action prior to now in these cases. The educational restrictions that I described, for example, are not a concoction of yesterday. They've been in process for a long time.
Mr. ROHRABACHER. All right. Now, would you knowas you've stated you have to talk in closed session about technology that continues to flow to Iran and other potential terrorist statesso, we know what's going on. But yet your position is that this government has been unwilling or unable to stop that technology flow?
Ambassador SESTANOVICH. I think you have a combination of different problems here. You have a breakdown of the old Soviet military industrial complex in which we talked about the questions of nonpayment earlier. A lot of people with incentive to make money in this businessto some extent they probably receive some cover from an overall Russian policy toward Iran that's too positive from our point of view.
Mr. ROHRABACHER. OK. So it's a little bit of both. They're unwilling and unable to stop the technology flow up until now. But how will the billions of dollars just sort of encourage them to do what's right? Then once that moneybut you're saying they're going to do certain things as we're dishing it outthey're going to be doing certain things that make things better.
Page 26 PREV PAGE TOP OF DOC Ambassador SESTANOVICH. On the economic side.
Mr. ROHRABACHER. All right.
Ambassador SESTANOVICH. The conditionality.
Mr. ROHRABACHER. Yes. Now, you don't blame us over here for thinking that this may be just more billions of dollars down the IMF raffle, do you?
Ambassador SESTANOVICH. Blame isn't the word I'd useI could say disagree.
Mr. ROHRABACHER. All right. Because, I mean, after all the taxpayers do have a certain amount of influence on us when they come to us and they say you're spending our money on what? It seems to me that this is a pretty hard one to explain considering the activities of this government. Let me just say here that we'vethat's OKthis is my last question. I know the light's turned red, so I might as wellAren't you really happy that Ronald Reagan said tear down the wall?
Ambassador SESTANOVICH. Yes.
Mr. ROHRABACHER. OK. Thank you.
Ambassador SESTANOVICH. You and I helped him write those words, Dana. I feel continuing pride over it to this day. I'm sure you do.
Mr. ROHRABACHER. Thank you.
Chairman. GILMAN. Thank you, Mr. Rohrabacher. Mr. Hastings.
Mr. HASTINGS. Thank you very much, Mr. Chairman. First, Mr. Chairman, let me associate myself with the opening remarks of the Ranking Member which I thoughtand thinkare sterling in their comprehensiveness of the problems that this hearing is focused on. I'd like to thank you, Ambassador, for your remarks, as well as the written testimony that you've offered.
Page 27 PREV PAGE TOP OF DOC I'd like to say something before asking but just two questions. That is, I feel as just one Member that I have been generally supportive of the Administration's policies with reference to Russia. I want to share with you a recent experience that causes hesitation when it comes to some of the things that we are doing.
Last week my colleague, Pat Danner and several others of usChairman Henry Hyde, Steny Hoyerwere in Copenhagen for the Meeting of the Organization for Security and Cooperation in Europe. There were 10 members of the Russian Duma that were present and we had a bilateral meeting with them. I did not get to attend most of the bilateral for the reason that I was the rapporteur of a Committee and had responsibilities that delayed me. However, when I was discharging my responsibilities, the most obstructionist activity that I've witnessed in the 3 years of participation in that organization came from those members of the Russian Duma who were delegates to the Assembly. You leave that kind of meeting with something in your craw about why am I going back and vote for IMF. Well, I'd take a bullet with all of my colleagues on supporting Administration against the sanctions policy authored by colleagues on the other side and some on this side. It makes it hard to want to supportnot only the Administration policy, but anything having to do with Russia. I don't say that lightly because I'm not retreating from my support, but I just offer it to have you know that when you're in meetings with people that are nastyI mean, you know, and unnecessarily so I might add. It makes it hard to want to do business with them.
You say, in response to Mr. Hamilton, in your general testimony that we can still do business with these people. But I've been in business in my life and when people were nasty to me, I just didn't do no business with them.
It was just that simple. Anyway, my bigger question, or the questions, that I have have to do with the Smith Amendment and religious freedom. I think we all know that in Russia there's widespread ethnic or hatred. There was an incident recently at Marina Roche Synagogue in Moscow and cemetery desecration. Can you explain to me what, if anything, the Yeltsin Administration is doing in that regard? How we are promoting efforts to ensure the minority faiths will have their freedoms as we would want them to? That's my only question, Mr. Chairman. Thank you for letting me make my statement, and ask my question.
Page 28 PREV PAGE TOP OF DOC Chairman. GILMAN. Thank you, Mr. Chairman. Mr. Bereuter.
Mr. HASTINGS. Mr. Chairman, I didn't get my response.
Chairman. GILMAN. Oh, I'm sorry. I thought you did.
Ambassador SESTANOVICH. Congressman, I've been in a lot of meetings with Duma deputies that I came out of feeling exactly the way you do. I've met a nasty 1 or 2 or 10 of them in my time. In my statement I indicated that, you know, there are a lot of Russians who really don't share our goals and a lot of them are in the Duma. It's not in all its corners, you know, a group of people on our wavelength. So I completely understand and I'd be interested to talk further about the particular difficulties you had on OSCE issues which, of course, are of great concern to us and a part of the European architecture we're interested in creating.
About religious liberty, as you know, the Congress was very unhappy with the law on religion passed last year by the Duma. As a result of that, we very actively pressed our concerns about how that law would be implemented, since the Congress said that aid to Russia would be cut off if there were an implementation of restrictions that were inconsistent with Russia's international obligations. The President certified in May that the implementation had been, in fact, protective of religious liberty. Concerns that had been raised about the discriminatory conditions under which religious organization new to Russia would operate had not been enforced. We're very heartened by the way in which that developed over the past year.
About the synagogue bombing, President Yeltsin immediately issued a strong statement as did other local officials. He has gone beyond just condemning an individual bombing and investigating it. He's spoken more broadly about this trend. He talked last month, for example, about the threat of growing anti-semitism. That's something that we're worried about, but it is encouraging to see that concern echoed at the highest levels of the Russian Government.
Chairman. GILMAN. Thank you, Mr. Hastings. Mr. Bereuter.
Page 29 PREV PAGE TOP OF DOC Mr. BEREUTER. Thank you, Mr. Chairman. Ambassador, you have a difficult job and you're dealing with a difficult part of the world, and a difficult non-government, almost, in Russia. I have four points that I want to bring to your attention.
With respect to the comments initiated by my colleague from California on Russian technology coming to Iran, I think we're really too late on that. I think what has been put in place has brought Iranian missile capacity that will eventually cause great difficulty for the Middle East and other parts of the world. I believe that the Administration has focused on the big pictureRussian-American relationswithout looking at the impact of its policy on this individual issue. I was in Israel in January and listened to their intelligence people coming back and found our intelligence agencies had the same informationwarning us what we should have done. We did nothing on that issue. I think we're, frankly, too late.
Second, I wanted to call your attention to an article in Reuter's January 13th ''Russian President Boris Yeltsin and Cyprus President Clerides said today that a controversial deal to supply the Greek Cypriot side with the divided island with Russian S300 anti-aircraft missile would go ahead as planned.'' This will put a very difficult situation that can divide our Greek and Turkey NATO allies. Our vital interest is very much affected by that decision. The Administration should be warned it cannot let this go forward. It must bring down all of its influence on Greece and Cyprus. We have Russian missiles and Russian technicians in that country and it can be used to create great difficulties in NATO alliance. Our vital national interest is involved in that issue. You cannot shirk your responsibilities on that issue.
Third, I wanted to say, with respect to the Armenian-Azerbaijan issue, the Russians continue to exacerbate that problem. We should bring that forcefully to their attention and say this is important to us that they desist.
Finally, I know, Mr. Ambassador, that you've been involvedor at least our government has been involved in assisting in investigation of the most recent assassination attempts against Georgia President, Eduard Shevardnadze. There have been repeated allegations that elements within Russiaand I'm talking about elements within the Russian Government, or former members of the Russian Government, including intelligenceare involved in those repeated and I think continuing assassination attempts. You have a responsibility to do what you can in that area as Administration to protect Mr. Shevardnadze. I know that things are being done in that respect to the best of our ability. But I also think we need to bring influence on the Russians to make sure that that kind of activity desists. What can you tell us about those investigations? Thank you for listening to those four points.
Page 30 PREV PAGE TOP OF DOC Ambassador SESTANOVICH. Congressman, let me start with the last one since it's very important. When I was in Georgia last month, I talked at considerable length to President Shevardnadze about his security situation. We talked, as you and I have talked, about the assistance that we are providing to him. As you know after the assassination attempt, we immediately sent an investigative team out there to help the Georgians with those efforts. Georgia, in the wake of that assassination attempt extradited a number of Russiana number of former Georgian officials from Russia. The Russians actually turned over a former finance minister, I believe, a man who worked for former President Gamsakhurdia, named Absnadza. The Russian Government offered extradition of a further list, but the Georgian Government declinedeven though they had initially sought an extradition of a larger group. There has been continued discussion about the extradition of Mr. Girgadza, whom you and I have also discussed in the past, who is said currently to be in Austria. I have no information to the contrary about that. But the security of President Shevardnadze is something we are very interested in and I know you are, as well.
About Cyprus, we certainly think the installation of those missiles would be destabilizing in the Eastern Mediterranean, and are working not only with our two alliesGreece and Turkeybut also with the Russians on this. Secretary Albright has certainly discussed it with Foreign Minister Primakov. It's at least encouraging that there seems to have been at least a brief delay in the delivery of those thingsa postponement into the fall.
About Iran, which is probably one of the more serious questions that you raisedyou said we're too late. We've been working on it for a long time. I think this is a problem which will continue. If we get ahold of it now, we're going to get the Russians to implement the kinds of policies that they and the system have createdwe will serve our interest in a very important way. I think we're making some progress there.
Page 31 PREV PAGE TOP OF DOC Chairman. GILMAN. Thank you, Mr. Bereuter. Mr. Berman.
Mr. BERMAN. Thank you, Mr. Chairman. Mr. Ambassador, are you familiar with how the Administration intends to implement what it announced yesterday in response to the Russian announcement by the commission? What restrictions does the United States intend to implement?
Ambassador SESTANOVICH. Yes.
Mr. BERMAN. On trade with the listed entitiesyou are familiar?
Ambassador SESTANOVICH. Yes.
Mr. BERMAN. I take it the Administration is going to suspend any assistance and impose trade restrictions on at least seven of the nine entities, on which it has independent evidence, have been proliferators to Iran. Is that correct?
Ambassador SESTANOVICH. That's correct.
Mr. BERMAN. If an American company wants to sell paper clips to one of those entities when the Administration implements its trade restrictions, will that company be allowed to do so? Is this a total embargo on trading with the listed entities?
Ambassador SESTANOVICH. Congressman, I believe so. I don't know whether there's a paper clip exception. But I'm happy to get back to you on that. I don't mean it frivolously. I'm just not sure whether there's any exception at all. I believe there isn't.
Mr. BERMAN. All right. If that's the case, reconcile with me The New York Times report this morning on this issue where and I'll quote from it ''Officials said they did not believe the new curbs announced in an apparent hurry would affect U.S.-Russian cooperation on the international space station or plans to launch American satellites on Russian rockets.'' One company sanctioned the Russian Space Agency, which is the Russian equivalent of NASA. I know the interplay between missile technology and space technology. If Glav Cosmos is one of the entities we are sanctioning, how do we continue sharing information with them and working with them on our joint space operations?
Page 32 PREV PAGE TOP OF DOC Ambassador SESTANOVICH. Congressman, Glav Cosmos is not NASA. The Russian NASA is called the Russian Space Agency. Glav Cosmos is a marketing firm that tries to put individual Russian entities in touch with foreign buyers. It is
Mr. BERMAN. You're telling me that New York Times is wrong?
Ambassador SESTANOVICH. I hate to break it to you.
I think that the reporter may have been misled by the name. Cosmos sounds as though it to be ought to be a
Mr. BERMAN. Cosmos?
Ambassador SESTANOVICH. Yes, exactly. We ought to produce cosmonauts.
Mr. BERMAN. Your understanding then is that in addition to the suspension of government assistance, there will be in effect export and import bans on dealing with the entities which are under investigation by the Russian Government?
Ambassador SESTANOVICH. That's right.
Mr. BERMAN. All right. Under what authority? What legislative authority?
Ambassador SESTANOVICH. IEPA and other authorities, Congressman, I don't have the full list of them.
Mr. BERMAN. Will they be using the existing missile technology control regime sanction legislation or will they be doing this under IEPA?
Ambassador SESTANOVICH. It's under IEPA.
Mr. BERMAN. Then, it's fair to say that, as to these entities, the restrictions the Administration will be imposing go substantially beyond the sanctions provided for in the legislation which the President recently vetoed.
Page 33 PREV PAGE TOP OF DOC Ambassador SESTANOVICH. In this respect, they do go beyond it. Yes.
Mr. BERMAN. Now, an earlier New York Times report on the IMF bailout indicated that the Administration was responsible for pressuring the IMF to substantially increase the amount of the bailout. Is that an accurate statement?
Ambassador SESTANOVICH. I really can't speak to that, Congressman. Because I think this was a technical issue discussed really between financial specialists as to what was the amounttechnical amountneeded in order to cover the gap that the Russians were facing. We certainly were trying to help them cover that gap.
Mr. BERMAN. The exact quote was ''The IMF, which came under pressure from the Clinton Administration, to increase the amount of money it was willing to lend to Russia and quickly wrap up the negotiations.''
Ambassador SESTANOVICH. Our judgment was that as a consequence of the deepening of the crisis, Russian needs had increased.
Mr. BERMAN. In the course of that, the same article indicates, to finance the Russian bailout, the United States agreed to lend the fund $2.1 billion. Is that contingent on any congressional action to fund either the NAB or the other portion of the Administration's request for a total of, I think, $18 billion?
Ambassador SESTANOVICH. No, I believe the general arrangements to borrow provide for the Administration authority to make loans to the fund under existing
Chairman. BEREUTER. [presiding] Gentlemen, it's time for you to wind up.
Mr. BERMAN. Yes. My last question isI'm curious, this whole notion you mentioned earlierswapping debt, I'm just curious. Why does someone who's holding short-term paper from the Russian Government at 120 percent interest want to swap it for some lower-interest, longer-term debt? What motivates the holder of that kind of paper with 120 percent interest to swap?
Page 34 PREV PAGE TOP OF DOC Ambassador SESTANOVICH. I'm sure only the bottomline, Congressman. I mean, this is a decision that's going to be made in private capital markets by people who will scrutinize the bottomline and make comparative risk judgments. You know, I don't know what the market response has been to it. I can understand the question you raised, but I'm not a specialist on that. I wouldn't be able to tell you at what interest rate it might make sense to do the swap.
Mr. BERMAN. Thank you, Mr. Chairman.
Chairman BEREUTER. Thank you. The gentleman from North Carolina, Mr. Burr, is recognized for 5 minutes.
Mr. BURR. Mr. Ambassador, would you define the ''abyss'' in the terms you used it?
Ambassador SESTANOVICH. The question was defining the abyss into which the Russian Government was looking over the past several weeks as it got deeper and deeper into a financial crisis. What I was referring to, Congressman, were the consequences of a massive devaluation.
Mr. BURR. Could you tell me what the consequences of a massive currency devaluation are?
Ambassador SESTANOVICH. Yes. They are financial institutional consequences; that is, probably collapse of the banking sector in Russia. They are social consequencesmassive increases in food, in the price of food in most Russian cities. They're political consequences; that is, the collapse of the principal achievement of the Russian Government's economic policy which is a stable currency. There are, finally, reform consequencesprobably putting economic reform on ice. So those four, I would sketch out for you as right down there at the bottom of the abyss.
Mr. BURR. Will we know when Russia has entered this abyss?
Page 35 PREV PAGE TOP OF DOC Ambassador SESTANOVICH. It'll be evident in an instant.
Mr. BURR. What conditions or requirements did the IMF demand that were not in the original $9.2 billion loan?
Ambassador SESTANOVICH. The conditions that you're talking about for the extended fund facility which was agreed earlier between Russia and the fund are less comprehensive, and require less in the way of prior action. For example, this week's agreement between the fund and Russia requires the adoption of major portions of a new tax code which had been stuck in the Duma for years.
Mr. BURR. Why was that not part of the plan before? Did we not see a need for that? Did the IMF not believe that that was structurally unsound?
Ambassador SESTANOVICH. I'm not familiar with the previous negotiations, but I can certainly get you an answer.
[The reply below was submitted following the hearing.]
The Russian Government's 1996 stabilization plan, supported by a $9.2 billion Extended Fund Facility of the International Monetary Fund, contained medium-term targets for revenue and spending as well as certain structural reforms. Over the following months, the Russian Government made headway on some fronts, like capital market development and banking sector reform, but under-achieved plan objectives on others, like reform of oil and gas monopolies, privatization, agriculture, private ownership of property and tax administration. A financial crisis was averted during that time, however, as international investors favored Russia as an emerging market and strong oil and gas exports bolstered the country's macro-economy.
In mid-1997, external factors turned quickly for the worse. Financial bubbles burst in Southwest Asian economies, with currencies and stock market values plummeting. Emerging markets all around the world, including Russia's, were suddenly under fire, with investors heading toward the exits. Furthermore, oil prices collapsed and now stand at a 10-year low. These developments, along with the fact that Russia had not improved tax collections and thus depended upon short-term borrowings to finance budget deficits, led the country to a spring 1998 balance-of-payments crisis.
Page 36 PREV PAGE TOP OF DOC On July 20, the Russian Government announced a new stabilization plan supported by $22.6 billion in loans from the IMF, World Bank and Japan. The Russian Government's proposed reforms, which include rationalizing the tax code and improving tax collection, cutting government expenditures, modernizing the budget code, improving bank supervision, eliminating non-cash payments for utilities and protecting shareholders' rights, are a mix of previous and new commitments. The Duma, Russia's parliament, passed some of these reforms when it last met in mid-July. Prime Minister Kiriyenko arranged to other measures by decree. Progress on other reforms, however, is outstanding.
The timeframe for implementing the remainder of these reforms is no longer medium-term. Given the extent of the current financial crisis, it is imperative that the Russian Government implements these fiscal and structural reforms quickly, and thus restores market confidence. We are now encouraged to hear that the Duma, based on instructions from President Yeltsin, may meet soon to debate adoption of further economic reforms.
Mr. BURR. Does the Administration believe that with this package, the crisis will be diverted?
Ambassador SESTANOVICH. I think the short-term crisis is one that the Russian Government will be a much better position to deal with.
Mr. BURR. But
Ambassador SESTANOVICH. The long-term difficulties require continuing action which are part of the agreement with the fund but not specified as prior conditions before the disbursement of money. They have to keep moving forward in a very resolute and effective way or else this problem will come back. There's no doubt about it.
Mr. BURR. You talked about and in your testimony you referred to some substantial changestransparency of the banking system, revenue collection, changes of subsidies of government-owned businesses. As a key change that the Russian Government must address for them to stay away from the abyssI think was your usage in that. Let me refer toand my Russian is not greatthe Gazprom?
Page 37 PREV PAGE TOP OF DOC Ambassador SESTANOVICH. Yes.
Mr. BURR. The natural gas company.
Ambassador SESTANOVICH. Yes.
Mr. BURR. Where, in fact, Moscow cracked down in early July, I think, or late June on the collection of taxes. You familiar with that?
Ambassador SESTANOVICH. Sure.
Mr. BURR. What, in fact, was the action when that company-40 percent owned by the Russian Governmentbegan to lobby the Duma that they couldn't do this?
Ambassador SESTANOVICH. There was a compromise. The Gazprom agreed to early and higher tax payments than it had been making until then, and has announced that before the end of this month, it will be selling off some of its assets in order to be able to pay the tax bill.
Mr. BURR. Let me remind you that when you went through these changes that the government must make, they were not partial changes. They must change the structure of the tax system. They must collect money.
Ambassador SESTANOVICH. Absolutely.
Mr. BURR. In this particular case, they went after the Gazprom, then Yeltsin withdraw the plan. Let me make his quote, ''A strong Gazprom means a strong state.'' Let me go back to what Chairman Gilman and Mr. Hamilton asked you very specificallydo you believe that the commitment of Yeltsin and his government is to fully carry out the things that you're in here telling us are part of this package?
Ambassador SESTANOVICH. That's what they've said, Congressman, and they're going to have to do a lot of it before they see a dollar.
Mr. BURR. This is 30 days old.
Page 38 PREV PAGE TOP OF DOC Ambassador SESTANOVICH. But let me tell you, I think you make a very important point. Some of the actions that the Russian Government has got to take don't depend on the Duma. They depend on their own initiative. It is crucial for the Russian Government to be acting effectively in those areas. One of them is, in fact, its ability to collect money from Gazprom. That is the ability of the Russian Government to tax the energy sector which is the most productive part of the Russian economy. It's going to be crucial to fiscal stability. There's no doubt about it.
Mr. BURR. Does the gas
Chairman. BEREUTER. The time of the gentleman has expired, but I would ask unanimous consent the gentleman have an additional minute because of the nature of the questions are really important.
Mr. BURR. I thank the Chair and I thank my colleagues. Does the Gazprom continue to sell gas to some regions without collection of money and other regions that might not be in sync with the government and Moscow demand payment up front?
Ambassador SESTANOVICH. It is hard to believe, Congressman, but Gazprom's official number for the percentage of its bills that get paid is 13 percent. So they deliver gas all over Russia and the former Soviet Union, and Eastern Europeactually Polandreceives a lot of its gas from Gazprom without getting paid. This is part of the barter system that is itself a problem in the Russian economy.
Mr. BURR. So if
Ambassador SESTANOVICH. Poland, for example, pays for two-thirds of its Gazprom gas effectively in barter.
Mr. BURR. If there's a 13 percent collection and we're counting on a successful revenue system to keep them from the abyss, what could be our deduction from that if in fact 13 percent of the bill is collected?
Page 39 PREV PAGE TOP OF DOC Ambassador SESTANOVICH. I don't want to tell you that 13 is the right number.
Chairman. BEREUTER. I'll allow the Ambassador to respond, but I think we'd better move on then.
Ambassador SESTANOVICH. They need to collect more taxes from the energy sector as a whole.
Mr. BURR. I thank you.
Chairman. BEREUTER. Mr. Burr, thank you very much for your questionsthey're good ones. The gentleman from New Jersey, Mr. Rothman, is recognized.
Mr. ROHRABACHER. Mr. Ambassador, a pleasure to meet you. The Administration is asking the Congressthe Houseto sustain its veto from the sanctions act. The problem that I face is, despite the good faith efforts of the Administration and I think to a significant degree, the successful efforts of the Administration, as you say, to cover the areas of concernmost of them. There have been gaping holes in the blockade, if you will, of these materials getting to Iran nonetheless. Despite whatever comments were received from the Russian leadership, it's pretty obvious that not enough was done by them to prevent this information and technology to go to Iran.
What I find curious then is why there appears to be this great coincidence literally the day that there was supposed to be a vote on overriding the President's veto on that date, but not any of the months or years before that. The Russians acknowledged and ID'ed the bad actors in Russia when they knew about them by name and incident for months and years before. In another great coincidence is the negotiation of the IMF package as they stood at the abyss. It's just so incredibly coincidental.
So then one has to ask well is it, in fact, a necessary predicate to their taking these kinds of responsible steps or promising to take these kinds of responsible stepsputting their back up against the wall? Haven't, in fact, sanctions been by and large successful in getting entities, governments to reform or change their policieslike we saw with regards to South Africa and apartheid, and other instances around the world? So why wouldn't sanctions work here? Hasn't the threat of these sanctions actually brought them to this point where they're going to ID these nine companies? So why haven't the sanctions, in fact, or even the threat of these sanctions produced what we wanted?
Page 40 PREV PAGE TOP OF DOC Ambassador SESTANOVICH. Congressman, let me say a word about the coincidence factor since you're entitled to raise this issue. I don't want you to think that this is the first time the Russians have actedor that we have acted to deal with this problem. There are, in my statement, an elaboration of other things that have been done starting with the order in January to create the kind of catch-all export control system that we have. Pursuant to that, the Russian Government has banned the activities in the presence in Russia of Sanon, the organization that handles Iranian missilesmissile engines. That's prior action. The restrictions that I was talking about with Congressman Rohrabacher to restrict the ability of Iranian students to acquire expertise in various missile-related fields is another example that's been underway for some time; the implementing regulations for a catch-all system that were created in Mayalso undertaken as part of a continuing discussion between our specialist on how to create an effective system to deal with this problem.
We think it's working. You can make the argument that the threat of sanctions has caught the Russian Government's attention. We could discuss that at length. Let me suggest to you, though, that just because the threat of something that we would consider unwise has had a good effect doesn't mean it's wise.
Mr. ROTHMAN. Mr. Chairman, may I have an additional minute? Thank you.
Ambassador SESTANOVICH. We consider this bill unwise, but I take your point about
Mr. ROTHMAN. I just want to reclaim my timeI only have a minute left. I understand there's been progress, but I do think, in fact, the good cop-bad cop routine works and oftentimes Congress has the obligation to be the bad cop, and let the President goor you goto the Russians and say ''I'd be glad to help you, but I've got these lunatics in Congress. You have to be more forthcoming.''
Page 41 PREV PAGE TOP OF DOC Ambassador SESTANOVICH. We would never say that.
Mr. ROTHMAN. Never.
I know. But I would think there's a great opportunity now for the Russians to demonstrate its effectiveness and its commitment by having some on-the-ground concrete results in Iran appear before the President leaves Russia in September. Perhaps that would be a good thing to seea good demonstration of the Russian commitment and ability to deliver on its promises. I just want to say one other thing. Regarding the IMF fundingif the Duma does not act, despite our best hopes and their present pledge to get them to act, to make reformswhat's the next step? Another IMF loan or do we let their economy collapse and have the market take over?
Ambassador SESTANOVICH. Congressman, your point about resultsthat's what we're focused on. That's what we're interested in. We made that very clear to the Russians.
Mr. ROTHMAN. Well, I think you can pass the word then that the Congress is also interested in results. That's one particular goal to see on-the-ground results in Iran by the time Clinton leaves; that until then, we're going to go ahead with the sanctions.
Ambassador SESTANOVICH. Your question about what happens if the Duma doesn't act, I don't want to get in the middle of IMF negotiations with the Russian Government on that. But let me tell you what the Russian Government has said about many of the measures. That is, they will try to use the full powers of the Presidency in order to implement some of these things by decree.
Chairman. GILMAN. [presiding] The gentleman's time has expired. Thank you. Mr. Payne.
Mr. PAYNE. Thank you very much. Yes, over here. I was just listening to my colleagues talk about the Duma and how you can characterize some of us. I guess that I didn't meet those Duma deputies, but I guess they're just similar to U.S. Congress people, right?
Page 42 PREV PAGE TOP OF DOC [Laughter.]
But, anyway, you don't have to answer that.
I know you want to, but don't. Don't. You're on enough hot seat as it is.
Let me just ask, just now one of my colleagues raised a question about Cyprus, and Cyprus has been around 30 years; the problem on Cyprus. And I just, you know, the fact that we have two allies there, you know, at one another.
I think that the Greek Cypriots asked for real talks to have the mobilization which no one bought, and second they really asked the United States to sell them similar to the S300's and we said no. I'm not condoning and I think that the whole buildup of the military hardware on Cyprus is just unbelievable but you can't blame the Soviet Union for the situation in Cyprus. I mean, they've done a lot of evil things and bad stuff, there's no question about it but the way it turns out is anything that's going on, all of a sudden seems like the Soviet Union is the cause. I think the cause is that no one's reallythe United States can't decide who they're going to hang around with, Greece or Turkey, and you've got differing points of view in the Administration, and you've got Turkey and Israel and Egypt having maneuvers in the ocean around, which I think is something to make the Greek Cypriots nervous.
So I think when we look at the whole picture, we need to look at it on balance. I just have some questions about basically, what do you think the second round of NATO talks of expansion looks like and how will the Russians take that? And second, how did they handle the first round of NATO expansion?
Ambassador SESTANOVICH. I think Congressman Hamilton's description of this is one I can't improve on. They don't like it, they don't accept it, but they see it's not going away. Moreover, they have seen some of the advantages of the relationship created between Russia and NATO. That's a relationship that was created at the same time that NATO undertook enlargement and it's an important part of the relationship between Russia and the United States and our European allies.
Page 43 PREV PAGE TOP OF DOC We've actually created what's known as the Permanent Joint Council which operates at different levels in NATO, ministerial, ambassadorial, to address common security problems in Europe. The Russians see that as positive. They continue to think that further enlargement would be undesirable; they say that, and we continue to make clear the Alliance's position that further enlargement will, decisions will be made by the Alliance on the basis of the readiness of future applicants to accept the responsibilities of membership, and on the basis of its impact on European security.
Mr. PAYNE. Just a question on the new U.S. attitude that it seems to be starting toward Iran: Now, there's been talk about attempting to start some kind of normalization, I guess. Where do you see that going and of course with this missile crisis we don't like to see Iran with a bunch of missiles that they can shoot around the world. But where do you see the U.S. talks? Are there serious talks going on with Iran and how does Russia fit into that? And aside from Russia selling missiles, if we could stop that do you think that there could be assistance from Russia in our new attempted relations with Iran?
Ambassador SESTANOVICH. Congressman, I think President Clinton and Secretary Albright have made very clear our interest in a dialog that addresses the serious difficulties that we have with Iran and its policies.
Certain elements of our view of Iran are not going to change, of course. We are going to remain completely committed to preventing the proliferation of weapons of mass destruction. The acquisition of missile systems by Iran would obviously be dangerous in just the ways that you described. So that whatever interest there is in a dialog to address our concerns, it won't be one in which we weaken our efforts in this area.
Chairman GILMAN. The gentleman's time has expired and thank you, Mr. Payne. Mr. Sherman.
Mr. SHERMAN. Thank you, Mr. Chairman. I know a number of my colleagues have asked questions about the Iranian missiles and all the focus is on Russian companies and naturally the Russians feel that the statute the President vetoed is aimed at Russia.
Page 44 PREV PAGE TOP OF DOC What is the Administration planning to do about non-Russian companies where there is evidence that they are transferring missile technology, and would such actions dispel the feeling in Moscow that we're being anti-Russian rather than anti the Iranian military?
Ambassador SESTANOVICH. Our concern of course is not limited to Russia nor is the Congress simply concerned about support for the Iranian missile program from one direction. The kinds of administrative measures that the Administration announced yesterday, could certainly be taken against non-Russian companies as their activities come to our attention.
Mr. SHERMAN. Is there any non-Russian companyI don't want you to get too specific herewhere the Administration is considering such action? I realize you're the special ambassador for the New Independent States and this is a worldwide question.
Ambassador SESTANOVICH. Let me answer your question this way, Congressman. We get information from time to time that we want to examine very carefully before we take any action of the kind that we took yesterday in these cases.
One of our concerns about the bill that the Congress has passed is that it obliges us to act less deliberately. It sets a very low standard for the imposition of sanctions and we would be obliged to act without the kind of confidence that we have, indeed, in the cases we announced yesterday. That would be bad policy and that's one of the reasons we consider it bad law.
Mr. SHERMAN. I would hope the Administration might suggest a few minor changes in the law and then urge the Congress to pass it and change the form as opposed to veto.
Mr. BERMAN. Would the gentleman yield just for one moment?
Mr. SHERMAN. Yes, I will yield.
Mr. BERMAN. I thank you very much. Just, the requirement of the bill is ''credible information,'' and the motivation of the bill was a feelingand it existed previously in the Bush Administration as wellthat the level of evidence the Administration seems to require, particularly in the context of the M11s to Pakistan, was a standard which was higher than that required in a criminal court beyond a reasonable doubt. That the standard of evidence was used as an excuse to not impose a sanction, but for other reasons the Administration didn't want to impose.
Page 45 PREV PAGE TOP OF DOC Thank you for yielding.
Mr. SHERMAN. Thank you. I would also point out that the standards in the bill are then to be applied by the Administration, and it's OK to have a really wide strike zone if you have a batter's umpire, and that the bill has to be interpreted in light of who's likely to apply it.
I want to commend Mr. Hastings for bringing up risks and anti-Semitism in the former Soviet Union, and commend the President
Ambassador SESTANOVICH. Former Soviet Union, fortunately, Congressman.
Mr. SHERMAN. Exactly. And commend the President for his very effective use of media in China and ask what is being done either in connection with the President's upcoming trip or otherwise, to use the media in Russia and the other New Independent States, to stress the advantages of pluralism and to repudiate anti-Semitism.
Ambassador SESTANOVICH. As you know, the President used the media as one of the innovations of his trip to China. With Russia, in Russia it wouldn't be innovative because already in 1994 when he was there he had nationwide questioning with callers from remote locations in a presentation that he made at a round table open forum discussion that he had on Russian television. You can be sure that we'll be considering opportunities of this kind for his visit in September.
Chairman GILMAN. The gentleman's time has expired.
Mr. SHERMAN. I'd like to request 10 more seconds. I hope that the President would consider visiting the Marina Roscha Synagogue or other visible symbol of the fight against anti-Semitism in Russia. Thank you.
Chairman GILMAN. Thank you, Mr. Chairman.
Mr. Sestanovich and my colleagues, I'd like to make a brief statement and then have a couple of questions. Before we receive testimony from our second panel of witnesses, I want to make a few observations about the recent announcement by the White House that U.S. sanctions would be imposed on a number of Russian entities that are believed to have exported missile technology to Iran. We've yet to receive any of the details from the Administration about those sanctions that will be imposed so we can't comment on the specifics of that decision.
Page 46 PREV PAGE TOP OF DOC But it's obvious from the timing of the announcement that the Administration acted when it did only because the House is scheduled to vote on overwriting the President's veto of H.R. 2709, the Iran Missile Proliferation Sanctions Act of 1998 for this Friday.
On October 25th of last year I introduced H.R. 2709 requiring prompt action by the President whenever missile technology is provided to Iran in violation of the Missile Technology Control Regime. Since then, H.R. 2709 has been moving through the legislative process up until including its veto by the President on the 23rd of June. I think it's regrettable the Administration is not taking any meaningful action until now against the threat to international peace and security posed by the proliferation of Russian missile technology to Iran. It's regrettable that the Administration acted only in the face of congressional pressure in what appears to be a cynical effort to head off an override of the President's veto.
The Administration, I think, is embarrassed to advertise the sanctions it's imposing is more comprehensive than those in H.R. 2709 after arguing for months that our legislation should be defeated because its sanctions would upset relations with Russia. In the President's veto message of June 23rd it was stated, ''the legislation's unilateral nature could hurt our increasing cooperation with Russian Government agencies and other vital areas. Furthermore, Russia would interpret this law as an infringement of its sovereignty affecting our ability to work with Russia on broader U.S. policy goals and on regional and global issues.''
The Administration's announcement can only be interpreted as an acknowledgement that these objections to our legislation were overblown indeed, I believe the Administration's decision substantiates a need for that legislation and for these reasons based on what we know of the Administration's action at this point, I do intend to urge our leadership to schedule an override veto on H.R. 2709 at an early date. Moreover, I would note that a blue ribbon congressional panel announced just yesterday that there is a growing threat that Iran among other nations may be able to threaten the United States with attack by long-range missiles within a 5-year period.
Page 47 PREV PAGE TOP OF DOC And in light of these findings, the American people now more than ever need an insurance policy against such a threat as provided by the Iran Missile Proliferation Sanctions Act.
And, Mr. Ambassador, just a quick question for the record. Is there any condition in the IMF loan that no monies go to help build reactors in Iran or to organize such contracts? Can you answer that very briefly?
Ambassador SESTANOVICH. There is no such conditionality, Congressman, but let me just comment briefly on the rest of your statement, if I could. You suggested that the Administration only took these actions because of the prospect of a congressional vote. In reality, we have been taking actions incrementally of exactly this kind for a long time. For example, the cutoff of contacts between U.S. Government agencies to suspend International Science and Technology Center funding; international partnership programs under the Department of Energy; those cutoffs were made a long time ago. Precisely because as a matter of policy we considered it necessary to make sure that no U.S. Government funding would reach entities involved in such activities. That's a decision we made long ago as a matter of prudence and policy.
Second, you quoted the President; you quoted an objection to the unilateral nature of the congressional sanctions. That's right and we still believe that. Yesterday's action was one taken jointly by the Russian Government and the U.S. Government. That is the pattern of cooperation that will help us to solve this problem. We think it's an alternative that Congress ought to take more seriously because it's working.
And finally, about the question of how serious this problem is, we think it's very serious and we share the concerns of the Commission that you cited. That's why we want to solve the problem in an effective way not simply, not through symbolic actions.
Mr. BERMAN. Would the chairman yield?
Page 48 PREV PAGE TOP OF DOC Chairman GILMAN. I'd be pleased to yield to the gentleman.
Mr. BERMAN. As one who's been involved in the legislation, supporting, co-sponsoring, advocating and advocating at the time of the veto that the veto be over inI think it is too harsh and inaccurate to conclude that it is only a result of this override vote that the Administration has become focused on this issue. The Chairman and I and others here perhaps as well have been present in at least two meetings with the Vice President who has recited at great length, the activities that the Administration has undertaken to get the Russians to get serious about entities in Russia that are proliferating and
Ambassador SESTANOVICH. Starting a year and half ago.
Mr. BERMAN. Yes, I'm less aware of the ones that started more than 7 or 8 months ago but I'm sure there were some. I do have a sense that the intensity of the focus increased substantially 6 or 7 months ago in an effort to get the Russians to develop export controls and enforce those controls. The problem, of course, has been that many of the proliferating activities continued and this most recent action is finally an effort by the Russian Government to identify bad actors who continued to act, and our controls are unilateral in that sense that you've talked about and are all encompassing, I hope.
But it is not just the day before yesterday or yesterday morning that the U.S. Government started to focus on this issue and while I think the immediacy of an override is an important attention-focusing mechanism and therefore don't disagree with the Chairman's conclusion that that legislation should be out there, I don't think we should assume that it was just that vote that caused the Administration to begin its efforts here. Thank you.
Chairman GILMAN. Any further comment, Mr. Berman?
Mr. Ambassador, regarding the action announced yesterday by Russia, I understand that all that has been said and done was that they will begin an investigation of nine firms. As far as we're concerned, that's not a sanction and of course it should have been done months ago and had the Administration acted more forcibly months ago we wouldn't have had this legislation. Can you give us assurance that similar sanctions will be imposed in the future, if missile transfers actually take place, presumably not on the eve of any override vote?
Page 49 PREV PAGE TOP OF DOC Ambassador SESTANOVICH. Congressman, I don't want to use your word ''sanctions'' because we don't consider that's what we're doing.
Chairman GILMAN. Well, call it ''limitation''; call it what you will; a rose is still a rose.
Ambassador SESTANOVICH. The kinds of restrictions that we announced yesterday will of course be applied in other cases where we have the same concern.
Chairman GILMAN. I used the word ''sanctions'' because that's written into the law, and it's a sanction, there's no question about it.
Ambassador SESTANOVICH. Well, when we suspend International Science and Technology Center funding it's a policy decision that we take because it makes sense in relation to a problem that has risen.
Chairman GILMAN. Well, Mr. Ambassador, we thank you and, without objection, the Committee will submit other questions for an expeditious response in writing.
We are going to have to recess because there's a vote underway on the floor and we'll recess briefly and as soon as the vote is over we'll continue.
Mr. BEREUTER. [presiding] The Committee will come to order.
Chairman Gilman asked if I would start the first panel. He'll be along shortly. We have only one vote instead of two as announced.
We welcome the second distinguished panel. I want to mention highlights of the biographical detail on the gentlemen here assembled.
Lieutenant General William E. Odom is director of National Security Studies for Hudson Institute and an adjunct professor at Yale University. He was director of the National Security Agency from 1985 to 1988. He was responsible for the nation's signal's intelligence, and communications security in that agency. From 1981 to 1985 he served as Assistant Chief of Staff for Intelligence, the Army's senior intelligence officer, from 1977 to 1981. General Odom was military assistant to the President's Assistant for National Security Affairs, Zbigniew Bryzinski.
Page 50 PREV PAGE TOP OF DOC Peter W. Rodman is director of National Security Programs at the Nixon Center. He's a senior fellow of National Review magazine. He was Deputy Assistant to the President for National Security Affairs from March 1986 to January 1987 under President Reagan. From January 1987 to September 1990, under President Reagan and President Bush, he was Special Assistant to President for National Security Affairs and NSC Counselor. In the Nixon and Ford Administrations from August 1969 to January 1977, Mr. Rodman was a member of the NSC staff and Special Assistant to Henry Kissinger.
Leon Aron is E. L. Waggon Fellow at the American Enterprise Institute in Washington, DC. Before joining AEI he was senior political analyst at the Heritage Foundation. During 1992/1993, he was Jennings Randolph Peace Fellow at the U.S. Institute of Peace. He received his doctorate from Columbia University where he concentrated on Soviet policy, political sociology, and U.S.-Soviet relations.
Mr. Goble, you're a distinguished gentleman.
I don't have any biographical details, but you've been before us a variety of times and have been very helpful in understanding the ethnic composition of the former Soviet Union. You are, I am told, publisher, RFERL newsline and Director of Communications Division at Radio Free Europe, Radio Liberty. Earlier Mr. Goble served as senior associate at the Carnegie Endowment for International Peace, special advisor for Soviet Nationality Problems and Baltic Affairs at the State Department.
Clifford G. Gaddy has been a fellow at the Brookings Institution's Foreign Policy Studies Program since 1991 and a member of Brookings' Social and Economic Dynamics since 1998. His recent book is ''The Price of the Past: Russian's Struggle with the Legacy of Militarized Economy.'' He was awarded the 1997 prize of the American Association for the Advancement of Slavic Studies as the year's best book on political economy of the former Soviet Union and Eastern Europe.
Page 51 PREV PAGE TOP OF DOC Gentlemen, thank you very much. Your entire statements will be made a part of the record. Is there any particular order you would suggest? General Odom, I think you're first and we're very pleased and honored to have you testify here today. You may proceed as you wish. Thank you all for your patience, by the way, and being here with us so long.
STATEMENT OF LIEUTENANT GENERAL WILLIAM E. ODOM, DIRECTOR OF NATIONAL SECURITY STUDIES FOR HUDSON INSTITUTE
General ODOM. Thank you very much, Mr. Chairman. It's an honor to be back in front of this Committee and to testify before you here today. I will submit my written statement for the record and offer about 4 or 5 minutes of summary remarks.
The IMF loans, I think, are a very bad and perverse idea for a number of reasons. Although a few reforms may be passed as the price for getting the money, the larger impact will be to impede the more fundamental reforms that are needed. Since about 1994, Russian reforms have been essentially stalemated, and this money will facilitate the stalemate.
The second point I would make is that far too much of the institutional legacy of the Soviet system remains undestroyed. IMF loans and other government-backed capital transfers do not contribute to new investments as much as they contribute to sustaining the old institutions. Let me cite some evidence which I think is useful in this regard.
It is frequently reported by scholars that Chubias' privatization program involved 77.2 percent of the large- and mid-sized firms in Russia being privatized, and about 88.2 percent of the small firms. That looks very encouraging. Those are exciting figures until it is realized that only 27 million workers are in the private sector. Forty million Soviet workers are in the state sector. Therefore, the state tax collections that pay the $40 million must come mainly from the 27 million in the private sector. A very unlikely outcome.
A third point that disturbs me about IMF loans is that the money will go largely into the hands of the oligarchy of new billionairesthe Berzovskiis, the Gusinskiis, and others who masquerade as capitalists, but who in fact are monopolists with strong vested interests in seeing that full market reforms remain uncompleted. They profited enormously from the early parts of the reforms. Now it is in their personal interest to see that reforms do not go forward. Mr. Gilman, the chairman of this Committee, said in an op-ed page recently that about $99 billion of capital assistance has been transferred to Russia but that about $103 billion has left Russia in capital flight. I think that is indicative of the situation that I've just described.
Page 52 PREV PAGE TOP OF DOC Fourth, the government is so weak that it simply cannot implement reforms even if it tries. You heard Ambassador Sestanovich say that, even if the Duma didn't carry out some of these forums, that the executive branch would do it on its own. Well, I'm willing to bet my salary that they don't have the power to do it, no matter how intensely they desired to do it. All they can do is to shore up the old system a bit longer the way it is, and as a result, I think the Russian people and a larger part of the political leadership in the country will increasingly see the IMF and the United States as part of their problem, not a solution, and their view of us is likely to become very, very negativemuch more negative than it is now.
The fifth, the only real beneficiaries of the IMF loans will probably be the German bankers who hold about 60 percent of the foreign exposure.
I would also make a sixth point. By September/October of this year, you will probably be holding hearings on an IMF loan to Ukraine. Ukraine is facing a similar financial crunch; it knows it's coming to a crunch. I was there in May talking to officials in Kiev and also on the regional level who know their financial predicament, and they are mindful that we have a policy of trying to be balanced between Ukraine and Russia. Therefore, they have a high level of confidence that they'll get at least half as much money as Russia gets.
So as we sign on to $22 billion to Russia, we ought to be thinking about signing on to $11 billion to the Ukraine and all the perverse impact that will have on the Ukraine.
Now I could offer additional reasons. Just let me end my remarks by saying that I think that the enthusiasm for this IMF package is not based on ill intent. I think it's really based on good intentions but very, very poor information about the structural dynamics inside of Russia. It simply is not true that if Yeltsin were to depart from the scene in Russia, that reform would stop. It has already stopped. It's simply not true that if Zyuganov, the Communist leader, were to come to power he could turn the system back to a command economy of the Soviet type. It is not true that for Zhironovski, or someone like him to take power, he could turn it into a Nazi Germany. If either one were to come to power, they would soon behave like Yeltsin. They would issue decrees which nobody pays any attention to; their cronies would steal as much money from the incoming IMF capital as possible; life would go on more or less the same. Russia is in a kind of suspended, weak state syndrome, very characteristic of many states in the Third World. These situations do not rectify themselves quickly, countries can remain in these conditions for decades. In fact, that is the norm.
Page 53 PREV PAGE TOP OF DOC Therefore, the notion of an available abyss discussed earlier today to frighten us into doing something to avoid it is a sort of fantasy for which I see no empirical evidence.
Thank you very much, Mr. Chairman.
[The prepared statement of General Odom appears in the appendix.]
Mr. BEREUTER. General Odom, thank you very much for your comments so succinctly and clearly delivered.
Next we'll hear from Mr. Rodman. He is from the Nixon Center. We look forward to your testimony. You may proceed as you wish.
STATEMENT OF PETER RODMAN, DIRECTOR OF NATIONAL SECURITY STUDIES, THE NIXON CENTER
Mr. RODMAN. Thank you, Mr. Chairman. You have my prepared statement. The main point I want to make here today is that it's time for the United States to stop being sentimental about post-Communist Russia, especially because post-Communist Russia is no longer very sentimental about us.
In the first few years after the Soviet system collapsed, Russia was indeed governed by a pro-Western elite. For a variety of reasons, the center of gravity of the Russian political system has shifted and the center of gravity of Russian foreign policy has most definitely shifted. The main theme of Russian foreign policy today is encapsuled in the word ''multipolarity.'' Chairman Gilman asked Mr. Sestanovich about this this morning. Promoting multipolarity means, to Russian leaders, blocking American dominance in the worldbuilding counterweights to what they see as American dominance in the world. This is the most prominent theme in almost every foreign policy pronouncement by President Yeltsin and Foreign Minister Primakov.
Russia's relations with China and Iran, which to me are the most problematical areas of Russian foreign policy, are justified by Russian leaders in precisely these terms. As you know, China and Iran are both purchasing advanced weaponry from Russia, including weapons that were designed to challenge the American Naval presence in the Pacific or the Gulfanti-ship weapons, for example. It's not simply the desperate need for cash that leads Russia to sell this equipment; it's not simply the breakdown of bureaucratic discipline in Russia that allows this to happen. Russian leaders openly say that the strengthening of these countries, China and Iran, is a positive contribution to ''multipolarity'' in the international system. For example, every time there's a summit meeting or a high-level meeting between Russia and China, for a long time the communiqués of these meetings always denounced ''hegemonism,'' or ''countries seeking hegemonism.'' They're referring to us here. Mr. Primakov declared on a visit to Beijing in November 1996 that ''the stronger China becomes, the more peace and stability in this region will benefit.''
Page 54 PREV PAGE TOP OF DOC In the case of Iran, which of course is high on the Congress' agenda at this point, Russia is selling both nuclear and missile technology. Mr. Primakov is on record as describing Russian and Iranian viewpoints on international issues as ''converging,'' and he has endorsed the Iranian view that the American fleet in the Persian Gulf is an ''alien presence.'' He said this on a visit to Tehran in December 1996.
Now in both these cases Russia is pursuing what it sees as its own national interest, and it has every right to have its own national interest. But it behooves us to understand that, even though Communism is gone, the laws of geopolitics have not been repealed, and Russia's national interest seems to be somewhat in conflict with ours in these two very sensitive areas of foreign policy.
There are a number of other issues which have come up in these discussions, problem areas: the bullying of Latvia this spring; Russia's habit of, I would say, shielding Serbia in the Balkan crisis and shielding Iraq in the U.N. Security Council.
So, even though there's a huge difference between Russian foreign policy and Soviet foreign policy, I think we do ourselves no service by ignoring the number of serious issues on which there is a certain conflict here.
The other immediate issue on your agenda, of course, is the IMF bailout. Though I'm not an economic expert, I do find the arguments against it persuasivethe capital flight; the apparent inability of the world community to hold Russia strictly to the supposed conditionality with which this money is given. I am also told that every opposition political figure in Russia from Yavlinsky to Lebed is against this, thinking that the money will only go to line the pockets of the kleptocracy and will not promote real reform. But I leave that to the economic experts. I would say that the economic arguments are only reinforced by the foreign policy arguments, that our stake in helping Russia begins to diminish as these foreign policy trends persist.
Page 55 PREV PAGE TOP OF DOC Thank you, Mr. Chairman.
[The prepared statement of Mr. Rodman appears in the appendix.]
Mr. BEREUTER. Thank you very much, Mr. Rodman.
Next we'll hear from Dr. Leon Aron, Resident Fellow at AEI. Dr. Aron, you may proceed.
STATEMENT OF LEON ARON, RESIDENT FELLOW, THE AMERICAN ENTERPRISE INSTITUTE
Mr. ARON. Thank you very much, Mr. Chairman. I will just make a few points and submit a written statement. And I apologize for reading. I don't usually do that, but in the interest of saving time, I'll try to be brief.
The seventh anniversary of the Russian Revolution, exactly 5 weeks from today, will mark a unique concurrence of three events: First, it was the century's greatest anti-Communist revolution that ended the rule of the totalitarian state over 265 million people. It was also history's greatest single act of national liberation, with 14 new states gaining independence and 15 if you count Russia itself.
Now finally, it was also a final act over an unprecedented peacetime shrinking of the world's largest militarized empire. Each of these revolutions within a revolution provided a powerful momentum for Russia's transition along separate but interconnected lines from the popular revolt against a totalitarian Communist state toward democracy and capitalism, which is in essence an attempt to fashion in a few years a capitalist democratic order on the ruins of a giant militarized obsolete, state-owned, non-monetary, urban industrial economy that employed the absolute majority of the country's work force.
Second, from national liberation and postimperial chaos to coexistence between Russia and the New Independent States in the former Soviet political strategic state.
And finally, from the hasty imperial retreat to fundamental reevaluation of national priorities and the new role on the world scene.
Page 56 PREV PAGE TOP OF DOC The reason I enumerated those things is because Russia's movement in each of these directions has come to form core criteria by which we judge that country's progress and on which we ultimately base our relationship with it. So let me just briefly dwell on each of those three points.
First of all, in assessing this progress we must be relentlessly watchful and critical of human error and all seasons in venality, although in this exercise we cannot hope to match Russian people themselves and their free and vibrant mass media. Yet we also need to be realistic, I think that's very important, in our expectations and take care less falling short of our wishes be equated with falling short of what is possible today.
Alreadybefore I quickly mention the obstacles on each of those roadsit is quite simple and obvious that with the heavy and pernicious legacy and all the obstacles, the sorting out of which will probably take decades, never in the almost four and a half centuries of the modern Russian state has there been a Russia less imperialist, less militarized, less threatening to its neighbors in the world, and more affected by Western ideals and practices than the Russia we see today. Now, quite apart from the human factor and mistakes, miscalculations, and simple ignorance that invariably interfere with projects of such magnitude, the progress is and for a long time will be slowed by the seven decades of Soviet rule and in many cases several centuries of national traditions. For example, the road to a capitalist democracy will obviously be handicapped. Let me just list a few key obstacles.
There's a century-long tradition of a patrimonial state, which is a state that not only monopolizes politics, but also monopolizes people's livelihoods by owning the economy and running it through a corrupt bureaucracy. That goes beyond Soviet totalitarianism. This is a Russian tradition in many respects. There were not even small pockets of societal autonomy of church, town, or university cooperation that gradually expanded in liberal democracy. There were 60 years of complete criminalization of any private economic activity. And let me also mention the Velvet Revolution which we all applaud and admire but which did not, as in the case say, of Germany or Japan, lead to denouncification and in fact left the entire industrial nomenclature in charge of the Russian economy, and in charge of those 40 million people of whom Bill Odom spoke.
Page 57 PREV PAGE TOP OF DOC In the economy itself, what we witness now is a product of Stalinist industrialization and militarism, with at least one-third of Russian GDP devoted to defense when Russia took over in August 1991. Every third person, including family members, were employed by the military-industrial complex. So even with the rapid demilitarization that occurred, it was not possible to cut this sector quickly enough. Let me just finish on the current crisisthat is part of the current crisis. In other words, the legacy of about 40 million people and the giant industrial sector that has been loss-making for decades, and whose burden is now upon the Russian Government and whose employees have no place to go except to look for salaries from the Russian Government, is part of the reason why the government is broke and why it has financed itself by increasing the higher and higher yield government bonds. Thank you.
[The prepared statement of Mr. Aron appears in the appendix.]
Mr. BEREUTER. Thank you, Dr. Aron.
Next we'll hear from Mr. Goble of Radio Free Europe, Radio Liberty. Welcome. Your entire testimony will be made a part of the record. You may proceed as you wish.
STATEMENT OF PAUL GOBLE, DIRECTOR OF COMMUNICATIONS DIVISION, RADIO FREE EUROPE, RADIO LIBERTY, INC
Mr. GOBLE. Thank you, Mr. Chairman. As you acknowledged, I have submitted my testimony and I will try to be quite brief because I agree with many of the things that the previous speakers have said.
We are focusing on Russia today in large measure because of the crisis which has been declared by the Russian Government and by others that Russia is facing. That is a dangerous thing to do because responding to a crisis mentality has the effect usually of forcing all of us to look only at how do we get through this crisis, rather than asking the more fundamental question, what are the underlying situations in Russia and elsewhere that keep generating these crises? We have been seeing a series of these over the last decade and constantly we have seen the analysis in this city at least, driven by responding to this particular crisis, rather than asking what happened that caused this crisis to happen in the first place, and why are we likely to see it again and again and again?
Page 58 PREV PAGE TOP OF DOC Now, obviously, confronted with the worsening financial, economic, and political situation in the Russian Federation, the United States and members of the international community have had little choice but to try to do something. Were things to really get out of hand in the Russian Federation, and I think there are real dangers of that I spent a great deal of my time in the non-Russian countries that emerged from the Soviet Union and I can tell you they are very worried about that possibility. We clearly have to do something. Unfortunately, much of the assistance program that we have designed so far has contributed to three unintended, and I think unwanted, consequences.
First of all, we have adopted a program that addresses only part of the problem and because it puts a bunch of demands on the central Russian Government, it may have the effect of further weakening and isolating the Russian President, and even triggering a new round of political instability in the country as a whole.
Second, because this package does very little to address the current day-to-day difficulties that the Russian people are living through, it is almost certainly likely to exacerbate rather than ameliorate the increasing social tensions in Russian society that are going to drive Russian politics in the future.
And finally, because this package is almost certainly going to benefit in the first instance, the Russian oligarchies, the large Russian financial interests rather than the Russian people who are going to see once again the west bailing out the old Communist nomenclature, rather than taking care of what happens to them. It is almost certainlyand this is I think the most dangerous aspect of what is going ongoing to continue to lead to continuing transformation of Russian attitudes toward Americans in general and the United States as well in a very negative direction. And to the extent that these three things continue, I think we face a very, very difficult future.
Obviously, the people who have put together the IMF program and other aid packages have wanted to help President Yeltsin and in the short-term he is going to get a political bounce out of this. But in the longer term, both the demands that are placed on him and the isolation that this allows him but then undercuts him with the political system is almost certainly going to mean that Mr. Yeltsin is going to issue ever more decrees that no one is going to respond to. And that creates a situation where we will get more promises that the Russian Government will be in no way able to live up to. More seriously, some of the very good ideas that we are pushing, if they are pushed forward in a crisis way, will have the effect of possibly shattering the Russian state. At the present time many firms, many individuals and a large number of regions benefit from the fact that the central government is unable to collect taxes. If the tax imposition is done quickly and massively, if the government is capable of that, I put it to you that at least some will opt out of the system in the ways that are possible for each of those three groups.
Page 59 PREV PAGE TOP OF DOC The second point that I wanted to make is that there is an increasing danger of a social explosion in that country. A variety of polls over the last 6 months show that social tensions inside the Russian Federation are now at their highest level since 1993, and that there is increasing support for extra systemic action, including massive strikes. That could be very destabilizing in and of itself. Polls also show a declining thrust in the Russian State and a desire to have somebody do something.
But it is my own, and let me conclude with this, it is my greatest concern that our package of assistance that has been worked out so far, strikes up precisely because it may bail out the large financial concerns, it may bail out the Russian oligarchies, it may limit Yeltsin's dependence on forming alliances within the political system, is undermining what ordinary Russians think about Americans. One of the things that I'm sure you've experienced, that I've experienced repeatedly, is that ordinary Russians, even in Soviet times, had very positive views about the American people and the United States. They remembered the aid the American people gave them during the Second World War and earlier with the American Relief Administration.
I've been on TV shows with correspondents who say, ''I could never believe my own government about the United States because I can still remember eating a Hershey bar.'' Unfortunately, now the Hershey bar is not coming to the people of Russia, but bank bailouts are going to the enormous oligarchies who, I think, we all agree are part of the problem. To the extent that Russia becomes a more democratic or at least a more participatory political system, those attitudes are going to matter. But unless we work more carefully to understand the underlying problems of the Russian society, and do not simply respond to the immediate economic crisis as defined by the Russians, we are almost certainly going to create a situation which will be far more dangerous than anyone that might be painted by those who talk about Russia falling into the abyss. Thank you, Mr. Chairman.
[The prepared statement of Mr. Goble appears in the appendix.]
Page 60 PREV PAGE TOP OF DOC Mr. BEREUTER. Thank you, Mr. Goble.
And finally, we'll hear from Dr. Clifford Gaddy, a fellow at the Brookings Institution. Dr. Gaddy, welcome.
STATEMENT OF CLIFFORD G. GADDY, FELLOW, THE BROOKINGS INSTITUTION
Mr. GADDY. Thank you, Mr. Chairman, for this opportunity to share with you my views on the current state of the Russian economythat's my area of expertiseand its implications for U.S. policy toward Russia.
The acute financial crisis from which Russia may now have gained a temporary respite makes it clear that the time is overdue for a sober analysis of Russia's economic experiment. This requires putting aside what I call the handicapping system that we hitherto have applied. By that I mean almost no matter what happens, we can praise Russia for having made great progress despite its poor starting position. That would be fine if we could keep an economy inside an incubator. But the Asia crisis made it clear you can't do that. The global financial markets ask only what return can you give on my money today? They don't care what kind of bad guys ruled your country before or what happened in your past.
Well, by these harsh standards, and they are harsh, Russia's economy was in dismal state even before the current crisis. Statistics agencies reported that industrial output in Russia in 1997 grew by 1.9 percent, but in fact real profits in industry were down by 5 percent. Now almost half of all industrial enterprises in Russia run a loss. That's up from 27 percent 2 years ago. Investment has been down for 7 years in a row, last year down to only 17 percent of what it was in 1990. And meanwhile, very few negative signals are being sent about this state of affairs. There are more corporate bankruptcies in the United States in a typical month than there were all of last year in Russia.
The share of barter and payments among industrial enterprises in Russia is now over 50 percent, and last year 40 percent of all taxes paid to the Federal Government were in non-monetary form. For the biggest enterprises, the percentage of cash tax payments is less than 10 percent.
Page 61 PREV PAGE TOP OF DOC Last December a Russian Government Commission that was studying the question of barter and non-payments, reached a startling conclusion which I'd like to quote: ''[We find that] an economy is emerging where prices are charged which no one pays in cash; where no one pays anything on time; where huge mutual debts are created that also can't be paid off in reasonable periods of time; where wages are declared and not paid, and so on.'' (The ''and so on'' is inside the quotes.) ''This creates illusory or 'virtual' earnings which in turn lead to unpaid or 'virtual' fiscal obligations [with business conducted] at non-market or 'virtual prices.' In short, it's a virtual economy.'' Not a market economy but something quite different.
Professor Barry Ickes of Pennsylvania State University and I have developed a model to explain the logic of this system. I think it might be of some interest since it has implications for tax policy, IMF bailouts, capital flight, and the role of Gazprom, which Congressman Burr asked about. But let me just emphasize the key point of our research. The virtual economy so-called, arises because of two fundamental facts. First, a huge part of the Russian economy is value subtracting, while, second, most participants in the economy pretend it is not. Barter and artificial overpricing turn out to be the main mechanism used to sustain the pretense. The pretense is what causes all the problems.
The virtual economy has clear negative effects. I'll just mention three: Restructuring. Why restructure if you can survive as a value subtractor in this system? Economic performance. Output in this virtual economy is overpriced hugely. Russia's GDP is exaggerated. Its growth is exaggerated. Last year it was virtual, not real. Finally, there are bad implications for the public sector and the budget.
Now, the virtual economy is not exclusively negative. It is the social safety net in Russia. It is wildly popular among most Russians because it protects their jobs. To dismantle it would be very costly socially, and therefore politically. That's why the government cannot and does not want to really reform.
Page 62 PREV PAGE TOP OF DOC But while it provides stability in the short-term, in the long-term it's a dead end. That brings me to the bailout. I opposed a bailout. I believe and still believe that the present form of a bailout, bailing out this virtual economy, is not in Russia's own long-term interest. But now we have to think about the future.
The Russian economy is headed for another crisis in the near future. It will be worse than the one we have just experienced. The current bailout package is not enough money to avert a crisis for more than a year or a year and a half at most. We would be well-advised to use that time to prepare for the next crisis. By that time both we and the Russians must already have begun to wrestle seriously with possible solutions that go far beyond the emergency bailout we have just witnessed. I don't know what a solution would look like exactly. I do know that it will be very difficult, distasteful for both us and the Russians. It will cost us much more money than we have spent hitherto. It will require much more of the Russians than they have done so far.
Many people would prefer that we walk away from Russia and leave them to their own fate. I don't think we can. Our fate is too closely linked to them. Neither we nor the Russians seem at this point to be prepared to face the depth of that country's economic and security problems, but I believe that we really have to. The best possible result of the current bailout would be to give us time to develop and discuss solutions that may seem utopian now. The worst outcome would be either to reinforce our cynicism about the possibility of changing Russia, or to lull us back into the delusion that Russia's future will take care of itself. Thank you.
[The prepared statement of Mr. Gaddy appears in the appendix.]
Mr. BEREUTER. Thank you, Dr. Gaddy.
I'll recognize myself first and I will just ask, is it responsible for Members of Congress to oppose the current IMF assistance package? Second, I would ask you, if you are a critic, and most of you certainly are, of our past financial assistance to the Soviet Union either directly or through international institutions, what do you suggest instead? And not in just assistance. What do you suggest instead should be our policies and actions in the broadest terms toward Russia? I welcome comments from any of the five of you. General Odom.
Page 63 PREV PAGE TOP OF DOC General ODOM. If I were in your situation I would say publicly that the bailout is not in the interest of the Russian people. The Russian people are going to suffer. Supporters of the bailout really can't be pro-Russian. I would put the political onus where it belongs in the first place.
The next point I would make is to express far more modesty about what the United States can do to influence things in Russia. We simply cannot cause liberal democratic market development in Russia by ventriloquy. And that's what we're engaged in. I was engaged in that in Vietnam for a year where I was writing the National Pacification and Development Plan, and the similarity between that experience and what's going on right now strike me as very great. We're just kicking this ball on down the road not facing the realities.
Now I really like Dr. Gaddy's analysis of the economy. I'm very much compelled by that. We see a lot of evidence for it. There's one small point in regard to your question that I would differ with him on. I don't think we're so inter-linked with Russia as he believes. I do think we have the option of stepping away from it. I'd even say that we're predicting to do something about it. We're out of touch, not having much positive influence on Russia, rather perverse influence.
So the idea that we have some kind of option to do something about it is an illusion that has to be unmasked.
Mr. BEREUTER. You all remember my two questions?
Mr. GOBLE. Yes.
Mr. BEREUTER. Mr. Goble.
Mr. GOBLE. Thank you, Mr. Chairman. I think it should be made very clear that those who care about what happens to Russia and Russia's neighbors and Russia's place in the world, can't be happy about any program that simply allows the current situation to limp along without addressing fundamental realities. And therefore I don't think there should be a problem for anyone being very clear that this is not a solution. It may be the only thing that could be done in the circumstances but it's not a solution. That I think is the most dangerous problem, the assumption that this is going to solve the problem. So that's to your first question.
Page 64 PREV PAGE TOP OF DOC With respect to the second, I think there are two very different things that need to be done. On the one hand, General Odom is absolutely right that we've got to stop acting as if what happens in Russia only depends on us and that we can transform the situation. We have over-promised way too much and we have also, I'm afraid, misled our Russian friends by lying about the situation there. In other words, calling things democracies when they're not; calling things free markets when they're not; calling things stable when they're not. All in the name, I think, of avoiding having to take some responsibility. We should not be over-promising and we should not be mislabelling. At the same time it seems to me that we should pursue what you can call, I guess in a jocular way, a tough love policy. If you're going to tell people what to do in terms of their domestic affairs or their foreign policy, you had better either have the resources, the sticks to make sure they do it and which we don't in many cases have with respect to Russia, or you'd better throw some resources.
If we are not in the west prepared to invest massively, and I mean investment in the broadest sense, not in the narrow Wall Street sense, then we had better be very honest that this is going to be a problem area more or less forever. I don't think we can overcome it by ourselves and I think the Russians should be told, we're not going to do it for you. At the same time, I think, having gotten involved, the way in which we would exit and do nothing could be tragic as well and could power some political forces in that country to a situation where they would try to challenge us as a way of a surrogate solution to their own domestic affairs.
Mr. BEREUTER. Who else has alternative foreign policy suggestions? All right. I will recognize the gentleman from California, Mr. Berman, for 5 minutes.
Mr. BERMAN. Well, I'm left sort of confused by all this. I remember going to a conference on Russia with a bunch of Russia experts last summer and things are starting to look better. Yes, the older people in Russia are having a very difficult time but the younger ones are really excited about their opportunities in the free enterprise system. I read about Yeltsin firing Chernomyrdin and thereby sticking it to the oligarch's best friend, hiring this promising young reformer to come in there and then reading that IMF bailout is tough love. It's requiring budget cuts; it's requiring tough actions to save the banking system; it's requiring a tax collection system which is going to impact on people who haven't been paying their fair share presumably to fund programs that would help the Russian people.
Page 65 PREV PAGE TOP OF DOC Then I hear all of you, and Dr. Aron, you were sort of, the time limitationI heard you discuss a historical perspective. I'm not quite sure where you ended up. The rest of you seemed to be very opposed to what this Administration is doing.
General Odom, I mean, Zhironovski was the Communist leader, againZyuganov, Yeltsin, doesn't make any difference which one of them is leading, and with the exception of Dr. Gaddy, at least and a few of you, I had a sense of walking away. I mean, don't stay focused. I don't know what you mean by investment in the total sense but if you're talking about $100 billion aid packages to the Russian people or something like that, I mean that is not a very realistic option in this particular political environment.
Maybe all of this goes to giving you again, tell me what you think. Mr. Bereuter's question. What do you think we should be doing other than denouncing the IMF bailout package which apparently we have no particular role in approving? It's being done with existing capital and that's not very focused on my part but then, sort of the general conclusion you have is so contrary to what current policy is that it somewhat astounds me.
General ODOM. Want me to start?
Mr. BERMAN. Anybody, yes, why don't you just, right across.
Mr. RODMAN. I have a thought. I apologize that it isn't totally responsive to the Congressman's question but I think there is a structural problem, not only in the Russian economy but in the Russian political process, and I have no idea what we can do about it. I think Yeltsin made a fundamental mistake a number of years ago in not creating a parliamentary party for himself. There was an opening at one point when he might have done this so he would have had allies in the Duma so he could govern, like a President or head of government in a parliamentary system. So the Duma is now in the hands of the crazies and he governs by decree. There's a limit to what you can do by decree, and it also lacks a certain legitimacy. This is also a system that still lacks some basic legal institutionsa contract law or a property law, things that are the fundamental legal basis for an economy. They still have a problem with private ownership of land which of course in our system is the basis of collateral, the basis of the system of credit.
Page 66 PREV PAGE TOP OF DOC These basic things never got done, and the lack of a legal system and the rule of law is one of the fundamental sources of their economic problems. How do you do business if you can't be sure that contracts are kept and are enforceable and there is a system of dispute settlement? Russia, amazingly enough, may be one country in the world where there are not enough lawyers. It's hard for us to imagine such a place. But these are things they have to do. There are fundamental things without which you can't really have a normalized economy.
Mr. BERMAN. I thought that was the whole purpose of our aid programs, the technical assistance. I've seen a bunch of lawyers from U.S. law firms spending a summer or a year, a month
Mr. RODMAN. Right. For 10 years this has been going on and I don't see the result yet. Maybe my colleagues that know better see it. But again, I don't know what we can do. I'm intrigued by Dr. Gaddy's suggestion that well, whatever happens with this bailout, we should spend the next year getting ready to do it right the next time.
Mr. BERMAN. But he didn't know quite what getting it right was. I'd like to hear Dr. Aron just because there was a touch of optimism at least
Mr. ARON. No, there is a
Mr. BERMAN. He's a priest. He'll give you optimism. I don't usually hear optimism from the American Enterprise Institutes.
Mr. ARON. For one thing, I think this bailout almost certainly prevented a devaluation of the ruble. This would have been an unmitigated disaster for the Russian people and I can't see how it could be said that it wouldn't be.
Mr. BERMAN. General Odom, by his expression, is saying, why would it be?
General ODOM. I mean there's just no argument. For the tsars, it prevents true information from surfacing. It deceives us about scarcity relations.
Page 67 PREV PAGE TOP OF DOC Mr. ARON. You know, the country depends on food imports and a devaluation of the ruble would have been disastrous. I'm not talking about just food imports. We're spending, I believe, $47 billion to prevent Indonesia from collapsing economically and socially. It seems to me that to say that there is no difference between Yeltsin and Zhironovsky is utterly irresponsible. It just flies in the face of everything that we know.
Finally, in terms of the economy, I'm very much interested in this because economics is politics in Russia today. Indeed, we know the statistics are lying and we know everybody is lying to everybody else, but one thing we do know is that, for example, every 10th Russian has traveled abroad in the past 2 years. Every 10th Russian, that's millions.
The production of domestic automobiles is up 12, 13 percent in the past 2 years. Russians now have about 35 cars per 100 families. Six years ago, they had about 20 at most. One million cars were sold to regular Russians in the past year.
I think there is a very vibrant urban middle class emerging in Russia. It's difficult to define; I'm in the process of delving into that data. But I think to say that everything is going to the dogs and there is no democracy is just utterly untrue. They've created, I think, what you would call a barebones democracy, that is, complete freedom of speech; complete freedom for opposition; complete freedom of political competition; true political choices, a huge range of political choices; and the ability of the people to vote on those choices. There is also the media, absolutely free from government censorship.
So I think we have a great deal at stake in the Russian system. I do agree with all my colleaguesto the extent that this loan will not lead fundamental reform, it is a waste. Do we trust IMF negotiators to extract, and more importantly, do we trust the Russian Government to carry out reforms while the Duma is packed by forces hostile, not just to the market but to private property? I call on Bill Odom to read the program of the Communist Party of the Russian Federation on that point.
Page 68 PREV PAGE TOP OF DOC To that extent, I have no recipe. No good will come out of this crisis unless it is used to push reforms through. This, incidentally, happens quite often in Russian history.
General ODOM. May I?
Mr. BERMAN. I'd like to
Mr. HOUGHTON. Yes, very briefly, very briefly because we've got to get to Mr. Campbell.
General ODOM. I'd like to just respond to two points that Dr. Aron made. I didn't say there was no difference between Zhironovoski and Zyuganov and these people. I said there would be little or no difference between the consequences of them coming to power. I could even make an argument there would be very positive consequences if Zyuganov came to power. The Communists came back to power in Bulgaria and totally discredited themselves. They were then voted out, making it possible to begin some real progress in Bulgaria. You know, conceivably that could happen with Zyuganov coming to power in Russia.
My point was that there are very weak state institutions in Russia and those conditions means that it doesn't matter what promises you get from people, they can't implement these. And what I'm calling for is owning up to the reality of the modest influence we can have on events there in any way whatsoever. I do not believe there is a ''right way'' economics program that can succeed with no legitimate property rights, with the stifling regulatory system, and with the ''rent-seeking'' Russian bureaucracy and with the present tax structure unchanged, even if Gazprom paid all of its taxes.
Mr. BERMAN. What about China?
General ODOM. China is an interesting contrast because China has kept a dictatorial political system while it has begun to put into place some of the institutions that are missing in Russia. I am not sure that it will succeed. I think it's a touch-and-go affair, but one can see a logic there that's missing in Russia.
Page 69 PREV PAGE TOP OF DOC Mr. GOBLE. Yes, I'd like to just offer three sentences. First in my prepared testimony I've said I'm for more aid to Russia and not less because I believe we've given too little since 1991 and that has been a mistake.
Second, because I believe we should be giving more aid, I think we should make more demands for structural changes. I think we've given just enough advice to make people angry without people getting enough assistance to make the difficult transitions that we all say we want, and especially that goes for the ordinary Russian and there are a lot of ordinary Russians who are not traveling and in fact don't have enough to eat.
And third, and I say this also in my prepared remarks, that I think we need more patience, not less, in what's going on there, recognizing how much change there has been, how far there is to go and how difficult it has been for any country that's never been a democracy, that's never had a free market economy, and that has never been integrated into a liberal democratic European system, to suddenly become all those things before the third commercial for our convenience at low cost. I think we've got to recognize that this is going to be a far more difficult task than people have wanted to acknowledge up to now. And that's why I'm in favor of more support, not less.
Mr. HOUGHTON. OK good. Mr. Campbell, please.
Mr. CAMPBELL. Mr. Chairman, thank you. My question deals with the degree of anti-Americanism that exists now and what might happen if we pushed a couple of policies that may on their face otherwise seem detracted. I'd like to know, and this is a question to anyone on the panel who can respond to me, I hear, our staff informs me, they showed me articles, that betray an anti-American feeling, sometimes perhaps made for political purposes responsive to the NATO expansion. But I think there may be a kernel there of truth of anti-Americanism. And I'd like to focus this now ondoes it exist, is it a serious concern, and then one of the policy objectives that's been suggested here is that U.S. aid should be tied much more tightly to an elimination of transfers of technology, particularly of missile technology or even U.S. monetary aid to purchase missile material or to decommission what would be potential antagonistic to the United States in the form of missiles.
Page 70 PREV PAGE TOP OF DOC I think that's eminently desirable obviouslyI cannot imagine a better use for the U.S. taxpayer's dollars than to purchase missiles that would otherwise be pointed at us. But it might be impossible given a sense of nationalism and a sense of anti-Americanism that it would touch off.
That's the area of my inquiry and I'd welcome any comments from the panel.
General ODOM. I'd like to offer one on missile technology and the nuclear weapons problem.
Mr. CAMPBELL. General.
General ODOM. Because it's an example of where extremely well-intentioned policies are producing perverse consequences. We are paying the Russians to demilitarize their weapons. That makes proliferation far more probable.
If you were a Libyan or an Iranian in charge of their nuclear program and someone showed up with 15 or 20 Soviet nuclear missiles, or rather weapons, warheads and offered them to you, they wouldn't be worth much. In the first place, you wouldn't know how to detonate them. In the second place, most of them probably wouldn't work. In the third place, in order to sustain them or get them into usable condition, you would need thousands of Russian technicians and their access to their own technical structures, back in Russia to do this.
If someone showed up with several hundreds of kilograms of plutonium and offered it to you, you would be delighted to buy it because then you could put the plutonium into your system which you are building and then you would know how to detonate the weapons you're producing. Now, if we left the Russian missiles as they are, they are deteriorating very rapidly and they're probably not very reliable because the money is not being put into keeping them up. In this case, we would be much better off than we are by demilitarizing them and making the fission material available to be stolen and sold.
So here we have another one of these perverse consequences as a result of ''feel good'' initial policies derived from the kinds of conferences Mr. Berman has been to where he's heard a lot from my former colleagues on Soviet politics, tell us about how great things are in Russia. They are the same people who were telling you about creeping interest groups and pluralism in the Soviet Union in 1968, 1970, or 1975 which have come about, so I would not be surprised that they're wrong today.
Page 71 PREV PAGE TOP OF DOC Mr. CAMPBELL. General, let me pursue this one second and then I'd like to hear the other members of the panel on the more general question of anti-Americanism which was my premise. If we were to adopt a policy then of purchasing fissile material, in other words, we're a ready buyer for any fissile material that any entity, no questions asked, wants to sell in the former Soviet Union. What would be your analysis of the implications of that policy? We would be the buyer, the first buyer, we will match any offer. We will buy it.
General ODOM. Well, I would like to see some more analysis of the world's supply of plutonium and what that would do to the overall world supply of plutonium. And if it really made a difference, you might make an effective case for buying it. It's not obvious on the face of it though, at least not to me. Now let me say one thing in support of some of the programs we've carried out in this regard.
I think our managing negotiations between the Russians and the Ukrainians to get them to move all the missiles back into Russia was a very positive move. And that's one I truly support. But when you get beyond that, even if the people in command positions in Russia want to carry all this out, they don't have the administrative capability in their degenerate organizations to get the responsiveness you need to implement the program.
Mr. CAMPBELL. Thank you. Mr. Goble.
Mr. GOBLE. I think when we talk about attitudes in Russia to the west, we need to distinguish both between two groups and two different kinds of attitudes. The attitudes of politicians as opposed to the attitudes of the population are very different on specific questions such as, for example, NATO expansion. If you read the Russian press or listened to Duma debates, you would think that Russians were ready to head with pitchforks to Spaso House over the question of including Poland in the Western Alliance.
In fact, while a lot of the political class is very exercised by specific American actions like extending the alliance eastward, overwhelmingly the Russian population doesn't show very much concern about most of the specific issues that we're talking about.
Page 72 PREV PAGE TOP OF DOC On the other hand, it may be just the reverse in terms of the politicians and the population; in terms of a general disposition to be in favor of this or that area of the world, this attitude of feeling, how do you feel about this country or that country. And in that case what I, in my experience in reading of polls and tapping into what sociological information we have, what I see is increasingly in the population, the overwhelmingly positive attitude that Russians have toward the United States in Soviet times and immediately afterwards, has deteriorated. But it's not about NATO. It's not about this or that specific policy. It's rather a combined and somewhat inchoate sense, that in the past the Americans, whatever they were doing vis-a-vis the Soviet Government or even the Russian Government were basically positive about Russians.
And I think that's changed that now there's a sense, you'll hear this and from ordinary Russians, that they really want us to suffer. This is why I'm concerned about some of the things that are done that benefit the Russian elite but don't benefit the Russian people.
Mr. CAMPBELL. Possibly in the name of the IMF bailout.
Mr. GOBLE. Well, let me just give you one small example of something that would make an enormous difference, that the west could have pushed for and didn't. As you know when you travel about the agricultural areas of the United States, when we have a bumper crop that overfills the silos, we put the grain on huge plastic sheets and then we cover it with huge plastic sheets which means that the losses to rottage, wastage, is about 5 percent. In the Russian Federation, they have much less silage capacity because the Soviets didn't really believe in it and now as was true in Soviet times, they put the grain directly on the ground. The wastage of the grain harvest in the Russian Federation as a result, before it's loaded on trains or trucks, is 30 percent. Now, that's an enormous swing in terms of your ability to feed people and to keep food prices down.
The only country of the 15, well, actually 12 former Soviet Republics and the three Baltic States, the only one of those 15 that uses plastic sheets like that to cut wastage is Alstonia. And they did it because the Swedes made it a conditionality of aid. And when the Ukrainian prime minister was in Alstonia 4 or 5 months ago and was driven out beyond the town, and he looked at all these huge white plastic sheets lying in the fields, he said what is wrong with your country. And he had to be explained that this was something very right indeed.
Page 73 PREV PAGE TOP OF DOC It is things like that which affect individual lives of large numbers of people and affect the way in which people perceive countries, the images if you will, that I was talking about and I think we have to distinguish between specific political objections to specific acts and the general sense of disposition positive or negative, and I think it cuts differently between elites and masses.
Mr. CAMPBELL. Well, thank you very much.
Mr. HOUGHTON. Thank you. Right, Mr. Burr, you've got some questions?
Mr. BURR. Yes, I do, Mr. Chairman. Mr. Rodman, who is the IMF bailing out with this package?
Mr. RODMAN. That's the right question. I think this is a boom to the banking system and the banking system is part of oligopolistic structure of the Russian economy. I suspect that this is helping to preserve a structure which is the problem and not part of the solution.
Mr. BURR. Let me ask all of you. Is there anybody on the panel that expects this is the last time that Russia will go to any of the international banks for loan packages of this magnitude? Nobody?
Is there anybody that believes that $17 billion, plus whatever's left in the $9.2, is sufficient to make the fundamental changes to not only the economy, but to the culture, which I think is in fact the majority of what the Ambassador was talking about but it was really in the context of the economy and I think that he really could have substituted ''culturally'' and been a little bit more honest with us.
Is there anybody that believes that $20-plus billion can create that economic/cultural change? Nobody?
Well, let me go to the heart of some of the changes. Can we expect Gazprom, the natural gas company, 40 percent owned by the government, is there anybody that believes that they will pay their taxes that are in arrears? Do you? Tell me why?
Page 74 PREV PAGE TOP OF DOC Mr. GADDY. What you have to understand about Gazprom is that Gazprom iswell, let me put it this way: In the simplified accounting model of the Russian economy that I've worked out with my colleague, you can think of the whole Russian economy as four sectors. There's a household sector that supplies labor to production; there's a government sector that transfers tax receipts to the household sector as pensions and wages of government employees. There are two production sectors. There's a huge value-subtracting sector (we call it ''M'' for manufacturing) and a value-adding sector which we call it ''G,'' short for ''Gazprom.'' That is basically what you have in Russia right now. The whole system is borne up by redistributing the value infused by Gazprom into this system, and all of the mechanisms that we observe of barter, over-pricing, arrears, and so forth really come down to mechanisms or devices to do this. When you, therefore
Mr. BURR. And let me ask you while you're going through thisand this accomplishes a transparent banking system in some way?
Mr. GADDY. Absolutely not.
The game is to keep everything as little transparent as possible. But taxes on Gazprom work into this in the following way. Gazprom, as we discussed earlierand the Ambassador cited a figure of 13% for the level of Gazprom sales inside Russia that are paid for in cash. Now he said ''paid for,'' and that's not true. A very high percentage of their sales in Russia are paid for. They're just not paid for in cash; they're paid for in in-kind transfersbarter. But that is essentially a free supply of gas to the entire economy, the subsidy coming from Gazprom. Why does Gazprom do this? After all, it's a privatized company. Well, the deal is if you don't do it, you're going to be nationalized. But the more important deal is that Gazprom, of course, exports huge amounts of gas abroad and keeps and pockets most of those revenues. It's a deal. So when the government now says we're going to extract more cash taxes from Gazprom, they're in effect breaking this deal. Gazprom will retaliate. Gazprom says, if you want us to pay taxes in cash, that means we have to collect cash from our customers, and if they don't pay, we're going to cut them off.
Page 75 PREV PAGE TOP OF DOC The government says that's exactly the right policy. The IMF says that's exactly the right policy. So, Gazprom says, ''Let's see, the first customer I can find is this nuclear command site here. We're going to cut off the gas.'' Gazprom has tremendous leverage, so you see it's a game going back and forth. Don't be misled by a temporary increase in taxes from Gazprom. It's when it starts to threaten the whole system that people will back down. There will be a back and forth and up and down. Yes, they can collect more taxes from Gazprom for a while, but not for long.
Mr. BURR. Yes, but I'm not so sure that you made the claim that we can expect that Gazprom will pay taxes in the future, though, and I think
Mr. GADDY. But only temporarily.
Mr. BURR. Only temporarily.
Mr. GADDY. Until it starts to threaten the existence of these value subcontractors that are living on the value provided by Gazprom. That's my point.
Mr. BURR. Given that you gave this picture where Gazprom was a quarter, that's a very alarming
Mr. GADDY. It should be.
Mr. BURR. picture for us to look at with this loan package.
I thank the chairman. I yield back.
Mr. HOUGHTON. Thank you very much. All rightplease, please; go right ahead.
Mr. BERMAN. I still want to try and understand a little bit more why China, by some measurements, does well when the credit for its doing well is given to the decentralization. The areas most decentralized are the areas doing most well, and in Russia the weak central institution doesn't allow the same kind of benefits. China is not a rule-of-law country. China is not a contracts-are-inviolable kind of country. China is not a country with institutions which arbitrate disputes very well, and all of that. I don't know if any of you have any thoughts on this, but I'd be curious to understand this better.
Page 76 PREV PAGE TOP OF DOC Mr. GOBLE. Could I suggest at least one? We Americans tend to use the expression ''law and order'' as if it were one word. In fact, there are lots of ways to get order. Law is a good one; it just isn't terribly common as a regulator. When an authorityChinese Communist Party, whateverhas the ability to compel performance, you get a kind of order. In Russia you have no such institution any more that can compel it, and you do not yet have a social support for law as a regulator, either in the institution of courts or even respect for the concept of law.
Mr. BERMAN. But I don't have the sense that China's success comes from the heavy hand of the Communist Party imposing order.
Mr. GOBLE. It's precisely the ability. If you sign a contract with a Chinese company, the Chinese political system will, A, have had a voice in whether that contract gets signed, and, B, will make sure that that contract is enforced. If you sign a contract with a firm in the Russian Federation, you are going to have a much more difficult time finding anybodythe courts, anybodywho will make sure that that contract is enforceable. That being the case
Mr. BERMAN. The enforcement is through a power of the party, not through some set of rules. It's not a set of rules.
Mr. GOBLE. No; it's not somebody giving dictate in specifics, but rather the overall sense that this will be enforced if we allow it to happen.
Mr. BERMAN. Which is why American companies like doing business there.
Mr. GOBLE. Or also in some of the other former Soviet republics where one-stop shopping with the President who can compel obedience by firms looks better to some. But I would say that the ability to enforce contracts is not the only test of progress, and that some of the countries that are very good at enforcing contracts may not be very good countries to live inwhatever elsebecause they deny basic freedoms.
Page 77 PREV PAGE TOP OF DOC General ODOM. Could I make a further point in this regard? I don't think we should over-estimate the success in China. These institutions are not very far along, and China's economic growth has been largely from massive, cheap, exploited labor which they have the political capacity to compel to work at low wages. It has a very large state-owned industrial sectorjust like Russiawhich is a drag on the economy.
So, I don't think we should be only sanguine about China going on indefinitely without a political crisis, if not exactly like the Russian crisis, one that has something in common with it. It seems to me some sort of political transition to a state with limited power will create a crisis in China, but that's another issue.
In the Russian case, the wreckage of the old regime is just much, much greater, and it's gone much further. And let me explain the implications of this with an example. You can litigate a contract dispute in Russia. You can litigate it in court, and you may even get a decision in your favor, but then there's nobody to implement it. If you truly want it implemented, or even without bothering to go to court to get a decisionyou decide you want a contract violation connectedyou can go to one of over 9,000 private security firms, and they have a fellow that will go down and see the violator and give him a chance to honor the contract. And if he doesn't, they blow him away. It's very simple. They've privatized the civil court system and the enforcement system, and they've kept too much of the economy, which ought to be privatized, in the state sector.
Now, this can sound sort of amusing, but we have an American Nobel Prize winner in economics who has pointed out some of the consequences of these kinds of institutional changes. I have in mind Douglass North. New institutions are springing up in Russia; they are taking root. And as North argues, as he looks back over 100 years of economic performance, when institutions get into place, they don't change easily. The path you set off on, you stay on for a very long period.
Page 78 PREV PAGE TOP OF DOC The new institutions emerging in Russia are not democratic ones, or I would use the term liberal with a capital ''L''. Democracy is not nearly as important here as the rule of law rights that can't be violated by the state. Such ''liberal'' institutions are not emerging, to speak of. Other informal institutions are emerging instead. And we're 7 or 8 years along since the U.S.S.R. collapsed. These informal institutions are beginning to take root, and I don't think anybody's going to change them very easily.
So we're going to have these new institutionsthat we sometimes call criminal, for a long time. They're not really criminal institutions; they're just functional substitutes for what the state should do with found institutions. They're going to persist for decades, and I don't think anybody is going to reform Russia very successfully in the next 20 to 30 years.
Mr. HOUGHTON. All right; thanks very much. The hour is getting late. You've been great to be here. I certainly appreciate your participation and your wisdom. Let me just make a comment myself. This is very discouraging listening to you. There's nothing hard
General ODOM. That's why the Russians are discouraged.
Mr. HOUGHTON. There's nothing hard here. It's what we can't do. It's the horror stories. Dr. Gaddy said we've got to have solutions, but I don't know what they should be, and obviously we can't increase taxes on Gazprom.
General Odom has said that we cannot offer liberal democratic formulaswe've got a weak state institution; we've got to face up to realities. But you know, there's nothing. I mean, if I'm a Memberif I'm Boris Yeltsin or President Clinton listening to you, I don't know what to do.
Mr. Goble says that it is clear that we must address the fundamental realities and stop being a godfather, and tough love and things like that. What do we do? What happens? What are the assets of Russia? Here is a huge country that is trying to emerge from a past which has suppressed all sorts of ingenuity and capitalist formations. What do we do to help these people?
Page 79 PREV PAGE TOP OF DOC I'm not sure that they can pay back the IMF loan, but what else is there? What do we do? Do we help them in security? Do we help them in their manufacturing base? Their manufacturing base is very, very inefficient as contrasted to China. We knew that originally when they tried to export products under the old Soviet system. The quality was bad, the price was high, the distribution was poor. How do we help them there?
They've got tremendous mineral resources. How do we help them? They've got a tremendous research community, which some American and European companies are taking advantage of. How do we help them? What do we do to help them? Because that's what we're sitting around asking ourselves. The IMF is not necessarily the answer, but what is the answer? One or two nuggetsthey've got a cash problem.
General ODOM. All I can do is repeat what I said earlier, Mr. Chairman. We have to be modest, we can't do much. A large part of the world is in the same shape, and we don't wring our hands about that. If you want to get a good picture of what Russia is, take the status nature and the corruption of the ministries of Egypt
Mr. HOUGHTON. Could I just interrupt a minute? I realize what you're about to say, and I think it's very poignant and very helpful, but it doesn't help the specific positive steps which are needed. What is needed? What can we do?
Mr. RODMAN. I think it requires a new leadership in Russia, a new President.
Mr. HOUGHTON. Can we help that?
Mr. RODMAN. It's up to the Russians to do something about it
Mr. HOUGHTON. If we can't, let's go on to something we can do.
Mr. RODMAN. I don't see how. Mr. Yeltsin was a great man in historical perspective; he helped to destroy the old system. He clearly is not someone who has the vision or the discipline to lead them into the new system.
Page 80 PREV PAGE TOP OF DOC Mr. HOUGHTON. Fine. What do we do to help Mr. Yeltsin?
Mr. RODMAN. I don't think we can interfere
Mr. HOUGHTON. What do we do? It's not what Mr. Yeltsin does. What do we do?
Mr. RODMAN. Well, General Odom is saying to cut the money off until it may encourage some discipline in that country, and at least avoid the illusion that this money right now is going to do anything.
Mr. HOUGHTON. How do we do that? Do we send Alan Greenspan over there? Do we send somebody from the FBI? Do we send the Chief Justice of the United States?
Mr. RODMAN. I think they've all been there. What is required is a different Russian leadership who will know how to use that wisdom.
Mr. HOUGHTON. OK, so they must fix these problems by themselves, in terms of the basic structure and the discipline in the system. Is that right?
Mr. RODMAN. That's my view.
Mr. HOUGHTON. OK. Are there any other things that we could do?
Mr. GOBLE. I'd like to suggest one thing. Last night I had the pleasure of meeting with 400 students from the 12 Commonwealth of Independent States and Russia and her neighbors. They had been brought here for periods of 3 months to 9 months. They're going back with a very much different understanding of how a political system works. I thought former Senator Bradley's ideas some years ago of a massive educational exchange were very good ideas. They didn't get the support that I would have liked to have seen. I think just as the German Marshall Fund and the exchanges that happened after World War III think that's a very positive thing. It's very long-term, obviously. It doesn't give you the immediacy, but all of those people who have had that experience here are going to be different. That's something you can do.
Page 81 PREV PAGE TOP OF DOC I mentioned the business about these plastic sheets and using them to make food prices go down. That would be very inexpensive, and it would make a big difference. It's estimated
Mr. HOUGHTON. All right; so what are you suggesting? The Department of Commerce or the Business Council or the Business Roundtable or the National Federation of Independent Businesses go over there and survey the market and see what we could do with plastic sheets? How do we get at it?
Mr. GOBLE. Well, I think we know a lot of what it can do because it's been used elsewhere. There's no reason not to use it here. We know what exchanges can do in changing images and cooperation and ideas about how societies should be put together. There's no reason it can't be extended here.
Mr. HOUGHTON. All right; any other suggestions?
General ODOM. I'd like to endorse the student exchange business. I agree with that comment. I think that's really a positive program. I also think it's very good that large numbers of Americans are running around in all parts of Russia.
My wife pointed out to me that if you go into the remote cities of Russia, you'll find kids with rucksaks, bluejeans, and hiking boots, and they're not Frenchmen, they're not Norwegians, they're not Germans. They're Americans, and they're having a very positive effect out there. I've had students come from Russia, and their experiences in the United States have been good, while they won't produce an immediate, tangible consequence, I think such exchanges can only be positive.
Mr. HOUGHTON. Well, gentlemen, thank you. I mean, the reason I've honed in on this is because I'd like to get something for the next wave. What do we do now? One of the problems with hearings is you have a hearing and then it stops. You fall off a cliff, and then you go on to a different subject. I hope that doesn't happen here because we've got such a tremendous investment in that country, nuclear weapons to the contrary notwithstandinga tremendous investment.
Page 82 PREV PAGE TOP OF DOC So what I ask of you is to, if you have any specific thoughts that we caneither technical or in terms of the extractive industries or manufacturing or trading relationships or intellectual property rightsanything we can do to help these people. Because we sit here and we talk policies and we share stories, and yet at the same time these people are crying out for helpand not philosophic or political help. They're really crying out for something specific to get them through this period, so any other ideas you have we certainly would appreciate.
So I thank you very much for being here, and I look forward to seeing you again.
[Whereupon, at 1:25 p.m., the Committee adjourned subject to the call of the Chair.]
A P P E N D I X
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