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41–976 CC






MARCH 11, 1997

Printed for the use of the Committee on International Relations

BENJAMIN A. GILMAN, New York, Chairman
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HENRY J. HYDE, Illinois
CASS BALLENGER, North Carolina
EDWARD R. ROYCE, California
JAY KIM, California
TOM CAMPBELL, California
JON FOX, Pennsylvania
LINDSEY GRAHAM, South Carolina
ROY BLUNT, Missouri

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SAM GEJDENSON, Connecticut
TOM LANTOS, California
PAT DANNER, Missouri
WALTER CAPPS, California
BRAD SHERMAN, California

RICHARD J. GARON, Chief of Staff
MICHAEL H. VAN DUSEN, Democratic Chief of Staff
MARK GAGE, Professional Staff Member
CAROLINE G. COOPER, Staff Associate

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    Ambassador Richard L. Morningstar, Special Advisor to the President and Secretary of State on Assistance to the Newly Independent States
    Hon. Thomas Dine, Assistant Administrator for Europe and the Newly Independent States, U.S. Agency for International Development

    Opening statement of Chairman Gilman
    Prepared statement of Ambassador Morningstar
    Prepared statement of Hon. Thomas Dine
    Questions submitted by Chairman Gilman to be answered for the record by the Department of State
    Questions submitted by Representative Hamilton to be answered for the record by the Department of State
    Questions submitted by Chairman Gilman to be answered for the record by the Agency for International Development
    Questions submitted by Representative Hamilton to be answered for the record by the Agency for International Development

House of Representatives,
Committee on International Relations,
Washington, DC.
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    The committee met, pursuant to notice, at 10:05 a.m. in room 2141, Rayburn House Office Building, Hon. Benjamin A. Gilman, chairman of the committee, presiding.
    Chairman GILMAN. The committee will come to order. The Committee on International Relations is going to take testimony this morning on our U.S. Assistance Program to the Newly Independent States of the Former Soviet Union. We have two witnesses this morning. First, Ambassador Richard Morningstar, State Department Coordinator of U.S. Assistance to the Newly Independent States and Special Advisor to the President on such assistance. Welcome, Mr. Ambassador. It is good to see you again here before our committee.
    Our second witness is the Honorable Tom Dine, Assistant Administrator for Europe and the Newly Independent States at the U.S. Agency for International Development. Welcome, Mr. Dine, and it is a pleasure to have you visit with us once again.
    Our testimony today will be confined to our two official witnesses. Regrettably, the committee's schedule has forced us to postpone the second portion of this hearing, which would have allowed for a panel of private witnesses to provide us with their views on our aid program to the former Soviet states. We have President Mubarak coming before us a little later this morning, and it has necessitated a rescheduling. We hope to schedule a second hearing on this topic with private witnesses some time in the next few weeks.
    Our two witnesses today both have several years of on-the-job training behind them and are probably two of our most knowledgeable individuals on our aid program to the Newly Independent States. Gentlemen, you appear before this committee at an important juncture, as you know. The President's budget request seeks approval from this committee and from the Congress for a major increase in our aid to the former Soviet states. The budget seeks to increase the appropriation for the Freedom Support Act, and to increase it substantially, at a time when the Congress would likely prefer to continue shaving it down.
    So, it will lie with you to defend the request that has been presented to us. It is a completely new initiative, the President's ''Partnership for Freedom'' Initiative. Oddly enough, I do not know of any Members of Congress who have yet heard from the President in support of this initiative. Perhaps some members of the committee will learn today when we can expect to hear directly from President Clinton in support of the initiative.
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    Our witnesses today also appear at a propitious time, since the committee will be holding a hearing tomorrow morning with Ambassador Jim Collins, our ambassador at large for the Newly Independent States, on the state of U.S.-Russian relations.
    That brings me to an important point for our witnesses today. The President's initiative as outlined in the budget request would increase our assistance for reforms in Russia from $95 million in the current fiscal year to $242 million in fiscal year 1998, an increase of 150 percent. Such an increase comes at a time when many in the Congress are seriously troubled by the trends in Russian foreign policy, and by the allegation that an increase in U.S. aid to Russia may be part of a bundle of so-called concessions being offered by the administration to respond to the Russian objections to the expansion of the NATO alliance.
    I note that a story, an article in the Washington Post of January 16 of this year cited a package of arms proposals, consultations and increased aid that was to be proposed to Russia by the United States and its allies. Let me say one thing briefly about the idea of such aid as a concession to Russia. We have been generous in our aid to Russia, far more generous than I think we have been given credit for by the Russian Government. Our Nation alone has allocated $4.5 billion in aid to Russia over the last 5 years.
    The other donor nations, including our European allies, have provided even more. Our Nation has also made available tremendous amounts of loan guarantees and investment capital to Russia. Our Nation has included Russia in the international space station project, steering almost $650 million in business to the Russian space program since 1993.
    The IMF and other international financial institutions have provided billions in low-cost loans to Russia. Last year, our Nation and other official creditors of the Russian Government arranged the largest debt rescheduling in the 40-year history of the so-called Paris Club, saving the Russian budget $6 billion in expenditures, just last year. Regrettably, Russian foreign policy has not reflected any great measure of appreciation for such assistance.
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    Whether it involves Russian nuclear reactor sales to Iran and India, advanced arms and military technology sales to Communist China, Russian reluctance to ratify the Start II Treaty, allegations that Russia continues to develop chemical and biological weapons, Russian pressure on the other former Soviet states to make them agree to Russian troops and border guards on their territories and a number of other issues, one thing is apparent: we do not have any kind of partnership at this point with the current government in Moscow. Accordingly, I believe that you have your job cut out for you, gentlemen, in persuading Members of Congress to support increased aid to Russia.
    Allow me to make one last point in my opening remarks. I suspect that it bothers quite a few of us in the Congress that we are being asked to approve assistance to help capitalize Russian firms, both large and small, and to approve international loans to the Russian Government at the very time when that government appears unwilling to carry out reforms that would end the flight of Russian capital out of Russia to foreign banks. That capital flight out of Russia is now estimated to a total of some $60 billion, and, regrettably, we cannot be certain that some of the capital fleeing Russia does not, in fact, come from international loans to the Russian Government.
    While we may be trying to do some good for the average Russian, especially the budding entrepreneur and small businessman, it seems that his own government is swamping our efforts and thwarting American interests around the world in the bargain. So, let me close my opening statement at this point and I will invite any of our colleagues who may wish to make some comments.
    Mr. Bereuter.
    Mr. BEREUTER. Thank you, Mr. Chairman. I think the hearing is certainly appropriate. Late last week, the staff of the Banking Committee and the House International Relations Committee was briefed by the State Department and USAID regarding the administration's proposed Partnership for Freedom. As I understand it, the State Department proposes using $160 million in subsidy appropriated for fiscal year 1998 to facilitate, and I am going to quote here, ''American investment in the Newly Independent States (NIS), through a new EXIM bank trade finance facility that will expand trade credits to more NIS countries and regions and allow more private sector lending to smaller U.S. and NIS companies and assistance to facilitate the flow of world bank and other IFI loans.''
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    That is a fairly surprising, shocking proposal, it seems to me, on the surface. I do not think the proposal has been well vetted. Certainly, Members of Congress should have been involved in something this fundamentally different in the way of a proposal before this time.
    What this does, it seems to me, is raise the specter that the Export Import Bank (Eximbank), will be turned into a foreign policy, foreign aid agency, extending credit and guarantees to non-credit worthy borrowers, and/or Russian and NIS financial institutions with questionable balance sheets and little experience in trade finance.
    It also immensely complicates the Banking Committee's task to renew Eximbank's charter, which expires on September 30 of this year. Of course, all of us in the Congress will face that difficulty, at a time when some of our colleagues, led by the House Budget Committee chairman are already alleging that Eximbank is corporate welfare. To add this complication to our difficulties of renewing the charter for Eximbank, to reauthorize what is a very valuable institution, in my judgment, is questionable at best as a matter of tactics.
    It also complicates this committee's ability to move a foreign aid bill, for which we have scheduled a markup, as I understand it, on April 9. In addition, it leaves probably all of us wondering what the State Department really has in mind regarding the provision of bilateral assistance to facilitate IFI loans. There are a lot of questions that need to be asked. I am prepared to ask a few of them later, but let me just ask one here in closing. An explanation of why the U.S. Treasury Department believes Eximbank should now assume the function of a U.S. foreign aid agency, what other mechanisms for conducting this proposed trade finance function were considered and how such a proposal could have been developed without consultation with the Congress or specifically the Banking Committee?
    So, I have grave doubts about the merits of what the administration is proposing. Certainly it creates great difficulty for us in reauthorizing Eximbank in light of the organized effort that involves such diverse forces as John Kasich and Ralph Nader, who have press conference after press conference already contending Eximbank is corporate welfare.
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    Thank you, Mr. Chairman.
    Chairman GILMAN. Thank you, Mr. Bereuter. Are there any other members seeking recognition?
    Mr. HAMILTON. Mr. Chairman.
    Chairman GILMAN. Mr. Hamilton.
    Mr. HAMILTON. Let me just welcome Ambassador Morningstar and Mr. Dine before the committee this morning. We recognize that they have a very important and very difficult responsibility. We look forward to their testimony and we welcome them to the committee.
    Chairman GILMAN. Thank you, Mr. Hamilton. We will now invite our witnesses to testify. As always, we will ask our witness to summarize their written statements, if they prefer. The prepared statements will be inserted in the record.
    Ambassador Morningstar.
    Mr. MORNINGSTAR. Thank you, Mr. Chairman and members of the committee. I would like to take my few minutes to talk about the Partnership for Freedom initiative, which is part of the President's budget request of $900 million for the new independent states, and in so doing, put into some context the issues that have been brought up during the statements made by the committee members.
    Partnership for Freedom represents the second phase of our assistance program. It will sharply focus our program on cooperative activities to support trade and investment, economic growth and the sustaining of civil society. I might add that this initiative, in general, has responded to the programmatic suggestions made by many Members of Congress and their staffs over the past few years. The program is consistent with the findings that were made by Mr. Gephart and Speaker Gingrich during their trip to the NIS a couple of years ago.
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    Secretary Albright described it quite well when she told this committee that the Partnership for Freedom's focus will be on cementing the irreversible nature of reform, a priority because the democratic transformation of the region is of vital and historical importance to us and because the ultimate victory of freedom over despotism in this part of the world is not yet assured.
    Partnership for Freedom is built on three fundamental principles. One, that the national security of the United States is immeasurably enhanced if Russia and the other NIS are stable market democracies. Two, that this transition is, in fact, a complex generational process and we must stay closely engaged, and three, that many people in the NIS are still facing severe economic hardship. We must turn our attention from basic macroeconomic stability in restructuring to economic growth. We must give the citizens, help to give the citizens of Russia and the remaining NIS a more tangible stake in reform.
    Let me mention a few specifics of Partnership for Freedom. In the area of trade and investment, we have looked at the obstacles to trade and investment, both U.S. trade and domestic investment and some of the existing financing gaps that exist in the NIS and the program specifically addresses these areas.
    One, it is correct that we have allocated $160 million to increasing investment in the regions of the NIS with a heavy emphasis on financing small business loans and equity. We are working with your staffs on various financing mechanisms and we have made definite proposals, but we are also flexible with respect to those proposals.
    The main key point is that we keep our eye on the ball and that we take the actions that are necessary to help develop small business and to develop investment in the regions. With respect to Mr. Bereuter's point, EXIM is one possibility. There were some advantages and are some disadvantages to EXIM from the standpoint of leverage and from the standpoint of delivering U.S. exports.
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    On the other hand, there are other alternatives and we are certainly willing to work very closely with your staffs to develop those alternatives and we do have some specific other ideas that we can talk about during the question and answer period.
    But, again, the main issue is coming up with a program that will help the regions and help small business.
    Another issue that we found as an obstacle to investment are human resource issues. We would plan according to our initiative to do business training directly relating to specific investment projects. For example, we might do as the Europeans do and set up specific trust funds to do training on projects where U.S. companies are partners. We will work in a focused way in the policy areas that affect trade and investment, such as tax reform, WTO accession and crime and corruption. We propose to increase the budget with respect to fighting crime and corruption in the NIS from some $12 million during fiscal year 1997 to $29 million in fiscal year 1998.
    In the area of building civil society, the question is how can we best stay engaged? One of our proposals is to endow foundations on a cost-sharing basis to create sustainable programs in the NIS. A second is to expand professional and academic exchange programs. I know for any of you who have met some of the people who have been here on exchanges, you can recognize the tremendous multiplier effect that they have and the effect that it can have on the long-term transformation.
    We will also expand community-based institutional partnerships and exchanges, and this work would include human rights work and work with political organizations. Also, again, fighting crime and corruption would be a major part of the program.
    This request will permit us to expand the budget of our Russia programs to $240 million to do the kinds of activities that will be important, whatever the political climate is between the United States and Russia. Let me put that number in context. Yes, it is whatever the percentage increase $240 is over $95 million in 1997. But, it is still 27 percent of the total budget request. It is 15 percent of what Russia received as part of the 1994 appropriation, which was approximately $1.5 billion.
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    Let me state at the outset and categorically, there is no connection between this program and any sweetener resulting from the NATO enlargement issue. That is not the point at all. This program was constructed several months ago. It has nothing to do with NATO enlargement. We are not even talking about the kinds of monies that could even begin to modify behavior of a government. This program is important in its own right. It is the kind of activities that we need to be doing in the future with Russia and the NIS, and I think that they are crucially important. Thank you.
    Chairman GILMAN. Thank you, Ambassador Morningstar.
    Mr. Dine.
    [The prepared statement of Ambassador Morningstar appears in the appendix.]
    Mr. DINE. Thank you, Mr. Chairman and members of the committee. Five years ago, this committee took the historic step of authorizing a major program of assistance to the Newly Independent States of the former Soviet Union. Unlike traditional development assistance, the intent of the Freedom Support Act was for the very specific purpose of helping the former Soviet states make the transition to democratic market economies. This transition was based on the premise that the people of these new nations wanted to reform dramatically their entire way of existence and that NIS reformers welcomed U.S. technical expertise.
    This morning I want to address the question of whether the program that you authorized in 1992 has produced tangible results. In my view, the answer is a cautious yes. Reform is happening and widespread, but not terribly deep. Reform is creating a private sector, thus providing the best chance of fueling economic growth. Reform is creating a growing middle class based upon the empowerment of the individual. Reform is decentralizing government and helping to create the rule of law. Not everywhere in the region, and certainly not in Belarus or in parts of the Caucuses or in parts of central Asia, but across enough of the region and in enough sectors that I can say that reform's roots are taking hold of people's political outlooks and economic expectations.
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    Reform has given oxygen to the lifeblood of civil society and private enterprise, and it has produced some remarkable, demonstrable results. Let me share some examples. One case does not make a legal system, however, one case can be a watershed. Such a case may have occurred in September, 1996 when a major U.S. company, Microsoft, succeeded in stopping two Russian computer retailers from marketing pirated software. Microsoft sued in the Moscow Commercial Court, using a native Russian attorney, and pinning its argument on international intellectual property rights. Since its victory, Microsoft's quarterly revenues in Russia have reportedly quadrupled. What is more, the two losing defendants in the case have become legitimate, paying customers.
    Private companies in the former Soviet Union, domestic and foreign, are trying to make a profit. They are helping to shape an environment in which standard international rules are followed. The Microsoft case shows American companies growing more comfortable with the emerging post-Soviet marketplace, which is gradually becoming less risky and more predictable. It shows courts and legal systems taking shape, not just as a patchwork of unenforced laws, but as real cases tried by real lawyers and judges. It shows reform taking root.
    Some might think that example, or others I will be reporting, less than earth shattering. So what if a single U.S. company wins a lawsuit? So what if a stock exchange in central Asia operates under procedures a U.S. securities broker would recognize? Then you have to consider the context. We are speaking here of the former Soviet Union. Under the previous regime, there was no private ownership, no market institutions, no legal foundations for a market economy, no democracy, and no basic institutions for citizen participation. All real power rested with the Communist party and the corrupt central government in Moscow. The individual was powerless, with no control over his or her personal destiny, much less over the destiny of his community or nation.
    Today, just 5 years after this committee sponsored the Freedom Support Act, I am able to report to you about a region in transformation, about people suddenly empowered, both economically and politically. A quick snapshot—in Russia, the private sector now accounts for 55 percent of GDP and employs about half of the labor force. Russia's stock market has swollen to more than $50 billion, bigger than that of Argentina, and is expected by the turn of this century to be larger than all of Latin America's, which is valued at $500 billion.
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    For the first time in history, a Russian leader won power in a democratic election, and just as remarkably, the losing candidates accepted the results. In Ukraine, some 400 formerly state-owned companies a month are being auctioned off. In Ukraine's power sector, for the first time throughout the NIS, there is a competitive, wholesale electricity market. Generation companies, assisted by USAID, compete daily to sell their electricity. Their fuel procurement practices meet international standards needed for access to World Bank loans. Local electricity companies can systematically track delinquent customers and collect with an accounts system. For the first time in the NIS, there is a national electricity regulatory commission with substantial independence.
    Two central Asian republics, Kazakstan and Kyrgyzstan opened private stock exchanges in their respective capitals last year. Kyrgyzstan's pursuit of economic stabilization has helped make the local currency, the som, the most stable currency in the region, at times appreciating against the dollar.
    Eleven individual television stations operate in Georgia, independent and free of government control and also in Georgia, democracy is flourishing since Edouard Shevernadze's election as the Republic's President 2 years ago. The Parliament has ironically become the bedrock of reform. Georgia's Parliament is now one of the most progressive throughout the NIS. The speaker of that Parliament happens to be in the United States this week. He is 33, an avid practitioner of Madisonian ideals and accompanied by two other members of Parliament who are about his age and as learned.
    In Kyrgyzstan, microenterprise has taken off. In only a year, USAID supported FINCA, the Foundation for International Community Assistance, has created 264 village banks with trained staff and an active membership of over 3,000 depositors. These community institutions have lent $500,000 to over 8,000 micro-entrepreneurs, 98 percent of whom are women.
    Also in the central Asian Republics, USAID has worked with nations dependent on the ROC to put into place a regional cooperative arrangement over water pricing and water rights that will help avoid further degradation of a body of water which the Soviets came close to destroying with their indifference to the environment and an ecological future.
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    At least two-thirds of the population of the former Soviet Union now live in countries where politicians are accountable to the people who elected them, where courts mediate civil affairs, where markets determine prices and market-based institutions such as stock exchanges and small privately owned businesses are functioning as underpinnings of economic life.
    You might ask then, if things are going so well, why do we need an increase in funding from $625 million to $900 million for the NIS? The simple answer is that it is in the U.S. national interest to sustain these changes. Reform is on track. USAID's work is showing results in so many places, but economic stabilization and structural change do not automatically translate into investment and growth, nor do new political systems automatically develop into participatory democracies.
    Let us make the reforms irreversible and produce much more change, as well. This year, in contrast to past years, I decided that our congressional testimony would not be arranged by country from Armenia to Ukraine, as it were. I decided instead that our testimony would reflect the way we actually do business, by strategic objective. USAID's programs in the NIS is not a potpourri designed to produce a variety of salutary effects on life in this or that country. It is rather a focused program of targeted assistance to promote U.S. economic and security interests, by supporting economic reform, democratic transition and social stability in each respective country and across the region as a whole.
    We have every right to be proud of our accomplishments so far in the NIS. When I say we, Mr. Chairman, I mean two succeeding administrations and the last three Congresses. Back in 1992, it was President Bush who saw the fall of the Soviet state not merely as cause for celebration, which it was and is, but as an opportunity to build peace and trade relations with nations with which for decades we essentially had neither.
    The Freedom Support Act which funds the NIS assistance program was the vehicle this committee sponsored and Congress enacted to facilitate the transition. Upon his inauguration, President Clinton continued and advanced his predecessor's policy. I wish we could say 5 years into the program that we have finished the job and are ready to pack our bags and return home. I cannot say that about the NIS. We are closing out programs in central and eastern Europe where new, free enterprise democracies have completed their transitions, but in the NIS, the progress made is far from sufficient.
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    Again, when I think about stock exchanges in Kazakstan and Kyrgyzstan, independent television stations in Georgia, microenterprises in central Asia and U.S. coordination of the effort to bring the countries surrounding the Aral Sea together, I know we are accomplishing good things, but not overnight. The revolutions that accomplish the things overnight are those that tear down. This revolution is about building and building takes time, and in this case, a good deal of persistence and perseverance.
    Mr. Chairman, again, thank you for inviting me to appear today. I look forward to working with you and your fellow members over the coming years.
    [The prepared statement of Mr. Dine appears in the appendix.]

    Chairman GILMAN. Thank you, Mr. Dine. I would like to welcome the gentleman from New Jersey, Congressman Pallone, to our hearing. Although not a member of our committee, Mr. Pallone has asked to observe the hearing and if time permits, to make a short statement after our committee members have finished questioning our witnesses. Welcome, Mr. Pallone.
    Gentlemen, the Russian economy appears stuck in its depressed state. Profitable monopolies continue to send capital out of the country to foreign bank accounts and charge exorbitant rates to lend money to the Russian Government. Russian Government revenues continue to decline precipitously, particularly in the wake of the lavish spending and tax relief steps taken by the Yeltsin re-election campaign last year, and corruption continues to scare off both foreign and domestic investment.
    Given all of those factors in Russia, is Russia heading for a major economic collapse in the near future? Could you state your opinion, and if not, how will its government try to overcome those problems?
    Mr. DINE. As I tried to say, Mr. Chairman, in my remarks just a short while ago, there are many good things taking place in Russia and the other states of the former Soviet Union. There are not so good things, and certainly Ambassador Morningstar touched on those, and that is why the re-emphasis this year.
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    But, I recall a recent article in The Financial Times whose headline was, ''Is Russia the New Siberian Tiger?,'' making reference to what is going on in east and southeast Asia. I think there is enormous potential in the Russian economy. We see the good things, we see the things that are dragging that economy. Yes, they have revenue collection problems. Yes, they have monopolistic large enterprises, but we, working with reformers in Russia, are taking those things on. We have a strong, anti-trust program with the Russian Government. We have a strong taxation program that is underway with the Russian Government and we are trying to face with our friends in Moscow and in the Oblast capitals and in municipalities the problems that this society as a whole faces from its 70-plus years as a command economy and a dictatorship. As I just said, it does not happen overnight. We have got to work with these folks. It is in our interest to make Russia a more normal country.
    Chairman GILMAN. Mr. Morningstar.
    Mr. MORNINGSTAR. When I was in private business, I always used to adhere to the saying that nothing is ever as good or as bad as it seems, at least in most instances. I think that the same can be said for Russia. There are a lot of positives that have taken place, there are a lot of issues.
    It is interesting—in fact, I was struck this morning, just glancing through The Wall Street Journal in which there was an article talking about how Merrill Lynch intended to open up in Moscow, and Morgan Stanley intended to increase its efforts in Moscow, because of its confidence that the Russian economy would significantly increase over the next 3 or 4 years.
    Russia has had a successful Eurobond issue. Some of the issues that we have been dealing with them on, such as excise taxes, have been resolved relatively favorably.
    On the other hand, I am not going to try and say that there are not major issues. There are very major issues and we are dealing with these issues on parallel tracks. There are major policy issues that stand as obstacles to investment, such as tax reform, accounting reform, all of the crime and corruption issues that we have been talking about. We need to address them. We need to continue to address them. The Vice President in his meetings with Prime Minister Chernomyrdin addressed these issues very loud and clear, and I expect the same will be true in the summit next week.
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    There has been over the past year a relative vacuum in economic leadership, and this is something that needs to be addressed and hopefully will be addressed with the changes in the Cabinet that are taking place right now.
    So, our approach is, let us work through these issues on dual tracks. Let us continue to work very hard in the areas of policy reform, let us work very hard in the areas of crime and corruption, and let us go out to the regions that need financing and help business within the regions and begin a process of bottom-up development. Thank you.
    Chairman GILMAN. Thank you, gentlemen. There appears to be a growing acceptance among top officials in Ukraine that their country suffers from a terrible government corruption at all levels, but it seems that little of a truly effective nature has yet to be done to combat it.
    Can you tell us, what are the prospects for an effective, meaningful, anti-corruption campaign in Ukraine at this point, since we will be giving a substantial amount of this funding to Ukraine?
    Mr. MORNINGSTAR. Again, corruption is a very major issue in Ukraine and it is an issue that we are addressing on a day-to-day basis. I think that the work that we need to carry out in Ukraine again has to be a dual track. We are working effectively today with the Ukrainian Government to work through basic reforms in areas such as tax reform, pension reform, deregulation of the bureaucracy. There are bills before the Rada now which we hope will pass over the next several weeks. That in itself will help the corruption issue, because as you deregulate the bureaucracy, there will be less opportunity for corruption.
    With respect to specific issues of corruption, we here and our embassy in Kiev are dealing with these issues every single day. The Ukrainian Government is saying the right things. We need to see the results. President Kuchma has announced an anti-corruption commission. We have to see whether that will result in solutions.
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    We are waiting to see successful resolutions of some of these disputes, such as the Gala Radio dispute. In fact, the president of Gala Radio, Joseph Lemire, is right here in the audience. We have to take from those disputes, we have to identify the issues, sort threads of issues that sort right through all of those disputes and work specifically with the Ukrainian Government to solve them. We are working to do that, and the proof will be in the pudding.
    Mr. DINE. Mr. Chairman, if I could just add a couple of words?
    Chairman GILMAN. Mr. Dine.
    Mr. DINE. In every one of these societies, crime and corruption raises its ugly head. I say it in the singular, because the phenomena in these countries seem to be linked.
    Our program at USAID is focused on creating a rule of law in each society, and the State Department Coordinator, working with other parts of our executive branch, is working on law enforcement. We have to pound away at this. Certainly, the non-corrupt people in these societies and these governments at the local level, the Oblast level and the national level, do not want it this way. Again, it is a question of us working with our friends, working with those who want good government, good society, good functioning institutions. We have to stay the course and to work on these problems. It is risky, but all of life is risky and we have got to be a part of the solution.
    Mr. MORNINGSTAR. Just for one last quick statement, and that is to remind the committee that the new initiative does provide for significant increased monies for the fight against crime and corruption and we think that that could be very useful. Thank you.
    Chairman GILMAN. Thank you, gentlemen. I am pleased you mentioned the Gala Radio case. We are looking to the administration to get Ukraine to do the right thing with regard to that case and we are fully aware of the issues involved.
    Gentlemen, one last question. In your request for additional funds to support the Partnership for Freedom, you indicate that you will be using Foreign Assistance Act funds to support activities managed outside the State Department and outside the Agency for International Development. You indicated that agencies like Eximbank and the Overseas Private Investment Corporation could be utilized. Some of the activities mentioned would require authorizing language.
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    I understand that Mrs. Larkin of the State Department's Bureau of Legislative Affairs released you to offer language to our upcoming authorization bill, which we hope to mark up starting April 9. Do you have some idea what language you will be offering and when the committee can expect to receive your language?
    Mr. MORNINGSTAR. That language is being worked on now, and we will be sending it up, within the next few days, and we understand the need to do that.
    Chairman GILMAN. It would be helpful if we get it before the recess.
    Mr. MORNINGSTAR. Right.
    Chairman GILMAN. Thank you.
    Mr. Hamilton.
    Mr. HAMILTON. Thank you very much, Mr. Chairman. First, the thing that really strikes me when I look at this request you are making is how much of an increase you are seeking. I do not have all the figures in front of me, nor do I know them, but if you look at the international accounts, I think there are probably two areas where you see huge jumps. One is the United Nations and the other is the NIS and the Partnership for Freedom initiative. I think the increase in assistance to the NIS is 44 percent. That is a huge increase.
    In comparison, not very many items in the budget are getting that kind of a jump in the administration's budget request. Why is that in the American national interest, to come in here with a 44-percent increase at a time when all the budget pressures that we are all familiar with are very strong? What is in it for us? How does it promote the American national interest to come in here and ask for a 44-percent increase in your funding level?
    Mr. MORNINGSTAR. I would answer that by saying that every dollar that we provide in assistance to the NIS is for us. That it is distinctly in our national security interest to be creating and helping to create and sustain stable market democracies in these regions, apart from the specific aspects which would have an effect on U.S. business and the like. But, the key that we just have to keep looking at things not from a short term standpoint, not from the standpoint as to what are the policy differences today with respect to Russia or with respect to Ukraine, but where do we want these countries to be 10, 15 and 20 years from now? If they are stable market democracies, that has to be in our national security interest.
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    Mr. HAMILTON. Mr. Ambassador, I agree, of course, but you know, we have a lot of national security interests all over the world. Why is it that this warrants a 44-percent increase, when half a dozen or maybe a dozen other national security interests do not warrant it? I mean, is it a fact that what happens in Russia and what happens in some of these other countries will profoundly impact the nature of the world in the years ahead?
    Mr. MORNINGSTAR. I think——
    Mr. HAMILTON. This is a key U.S. national interest, is it not, right at the upper tier?
    Mr. MORNINGSTAR. That is absolutely correct, and the two factors that are going to, where we can contribute to help this process is to do what we can and we cannot make the difference, but to do what we can to help economic growth galvanize, particularly outside of the major cities where they are having a lot of problems and to do the kinds of activities that are going to relate relationships, partnerships, exchanges and the like that are going to create a situation within that society that, over time, that there will be people there who want to make sure that, in fact, market democracy succeeds.
    Mr. HAMILTON. If we succeed at this, then the world is going to be a much more benign place than if we fail?
    Mr. MORNINGSTAR. Well, given that Russia still is the strongest country in the world outside of the United States and is the country that still has a major arsenal of nuclear weapons and is a country in which democracy still is not yet assured, as indicated by the last elections in which 40 percent voted for the Communist candidate, and which we have no assurance how another election will turn out, I do not think that we have any choice but to spend this small—in the big picture—this small pittance of money—$90 million to $240 million, and I realize that is a lot of money, but in connection with the entire U.S. budget, that this has to be an expenditure well spent.
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    Mr. HAMILTON. I do not want to get too much into the rating game here, but you are dealing with a lot of countries in the NIS, 12, I think, is that correct?
    Mr. MORNINGSTAR. Twelve, right.
    Mr. HAMILTON. Our interest, of course, is in reform, it is in economic growth, it is in building the new democratic institutions that you have spoken about. Since it is such an enormous area, with great variety, I am sure there are some countries doing better than others on reform.
    We would furthermore say, all of us, that the United States can only affect reform on the margins. What really counts is what happens inside the country, obviously, the quality of the leadership. We have scarce resources, we want to put them where they can do the best, help most in advancing reform. Would you identify for me the countries that you think are good reformers, doing well in the reform areas? If you will, would you also identify for me some of the countries that are disappointing in the reform area?
    Mr. MORNINGSTAR. I think we can start, and I know Mr. Dine would like to comment, as well. I think we are doing very well in Georgia—I should not say we are doing very well in Georgia, Georgia is doing very well.
    Mr. HAMILTON. Yes.
    Mr. MORNINGSTAR. As Mr. Dine mentioned, we both met with the speaker of the Georgian Parliament yesterday. Considering the problems that they had within that country going back a few years, some of the strides they are making in economic and political reform are quite significant.
    Armenia is doing quite well from an economic reform standpoint. We were disappointed, of course, with some of the issues surrounding the elections last year, but we are working and hoping that will straighten out.
    Kyrgyzstan has done quite well. Moldova had been doing quite well. We are still waiting to see how things, what happens as a result of the new elections that took place there, to make sure that they are still on track.
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    Most will say that, arguably, Russia is still the furthest along with respect to reform. They have made the largest strides with respect to overall economic reform. They have had basically, consistently free and fair elections.
    Mr. HAMILTON. It is still the 800-pound gorilla in this area?
    Mr. MORNINGSTAR. Absolutely.
    Mr. HAMILTON. Now, you have not told me the ones you are disappointed in.
    Mr. MORNINGSTAR. Well, obviously, Belarus has been a disappointment. That raises a question whether we simply cut off assistance to Belarus, or we spend——
    Mr. BEREUTER. The gentleman's time has expired, but please continue your response.
    Mr. MORNINGSTAR. Thank you. That begs the question with respect to Belarus, whether we just cut them off totally or continue to do activities that would help people who are still supporting democracy within that country. That has probably been the biggest disappointment.
    Mr. DINE. Let me take a cut at that, if I could, Mr. Hamilton. If you just take a diagonal line and stretch it out, at the top being the most reformed, most progressive countries in this whole former Communist bloc, Central Eastern Europe, as well as the former Soviet Union, then at the top are Estonia, Czech Republic, Slovenia, Poland, Hungary, Latvia, Lithuania, Slovakia. This chart would be based on political progress and economic reform.
    Now, Slovakia has had some problems on democracy, so it does not stretch all the way to the top, but its economy is booming. Then, Romania, Bulgaria, Russia appear. Albania has slipped in terms of democracy. The Kyrgyz Republic, as Dick just mentioned, and Moldova are getting close to the middle of that bar, that diagonal bar.
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    Then, at the very bottom, Turkmenistan, Tajikisten, Belarus and Serbia. Serbia has not gone through any reform—certainly Milosovic has ruled in an authoritarian manner——
    Mr. HAMILTON. Where is the Ukraine in that nice chart you have there?
    Mr. DINE. Ukraine is below Russia. Its reform programs—certainly democracy is flourishing, but its economy, as the Chairman indicated in his question earlier about corruption and other matters, it is just not quite there. If the Kuchma reform program, headed by Mr. Pynzenyk, can get through the Rada in the next month or so, and they can start implementing it, it will move. It will move quickly. It is a rich country and it has a determination to work.
    So, many of them are now bunched up in the middle and what we want to see is more getting to the top, obviously.
    Mr. HAMILTON. Thank you.
    Chairman GILMAN. Thank you, Mr. Hamilton.
    Mr. Campbell.
    Mr. CAMPBELL. Thank you, Mr. Chairman. I appreciate the two witnesses. I have 5 minutes, I have five questions. So, they are quick questions and see if you could keep your answers quick, as well, if you would be so kind.
    First of all, on that last point, I look at Armenia and Ukraine and I know that they were earmarked. I know that in general, the administration does not like earmarks. Just looking at the numbers, if we took the increase from Armenia and Ukraine from 95 to 97 and spent it in Russia instead, we would have two-thirds of what you want for the increase in Russia. Is your number for Armenia and the Ukraine responsive to the earmark and that political reality?
    Mr. DINE. Mr. Campbell, the earmarks over the last 2 years have hurt us dramatically in what we have wanted to do in terms of our strategic objectives. I know this will not sound very good in this environment of balanced budgets, but we need to do more, not less, so we can get to the finish line sooner.
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    If you keep cutting us and keep restricting us, particularly the way the Congress did the last 2 years with serious earmarks, in which we could not work very much in the star country, in the key country, to get back to Mr. Hamilton's point, it is going to take us longer.
    Mr. CAMPBELL. Thanks, just quickly.
    Mr. MORNINGSTAR. Briefly, with respect to the earmarks, and first in connection with the Ukraine, the earmark was $225 million. I have stated often, I do not have any problem with spending $225 million in Ukraine. My concern was in the context of an earmark of a $625-million budget. That number makes sense in a $900-million budget.
    Mr. CAMPBELL. The question is, where else it can go. My second question is, in the Partnership for Freedom Act, to me a positive, let me be clear, aspect, is if that is a revolving fund, your attempt for capital for small business? Part of the Partnership for Freedom will be capital for small business. Could you assure the committee that your plans there are for revolving funds, so that hopefully, we will have an ongoing, permanent supply of capital as opposed to just a one-time?
    Mr. MORNINGSTAR. That is the case with respect to much of it. We would be developing revolving funds, whichever type of mechanism that we used.
    One thing I should quickly clarify, too, from a statement that was made, I believe, by the Chairman earlier, there are no loans going to Russia. This program does not provide loans to Russia. This program provides a pittance of money, a very small percentage that even relates to the Russian Government, only tax reform types of things. This money is to go to businesspeople and to people out in the regions and in the communities.
    Mr. DINE. If I could pick up on your point about small businesses?
    Mr. CAMPBELL. Yes.
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    Mr. DINE. You know, we have learned a lot over the last couple of years. If we could start all over again, I would advocate, anyway, that we would focus on the development of small businesses, both small and microbusinesses, if you will. And, they have to have the capital to be capitalists, so our programs would be, in effect, credit programs (——) creating places that businesses could go to which, in time, would develop into mature commercial banks.
    Mr. CAMPBELL. Fair enough. The revolving nature is what you intend?
    Mr. DINE. Yes.
    Mr. CAMPBELL. The third of my five questions, I might make it, the housing allowance. In a previous hearing, we spoke about the importance of getting housing for Russian troops leaving the Baltics.
    Mr. DINE. Yes.
    Mr. CAMPBELL. Is that still the case and is that still an important aspect of the program?
    Mr. DINE. Well, that program is over, we have completed the job. We helped to build 2,500 units. We helped to place 2,500 other officers in the Baltics, both Estonia and Latvia. Both governments, the Estonian Government and the Latvian Government, are deeply appreciative, and we have notes of all kinds saying, thank God the occupying army went home.
    Mr. CAMPBELL. Is that true, there are no occupying Russian forces in the Baltics anymore?
    Mr. DINE. Well, there are Russians who still live in those——
    Mr. CAMPBELL. No, occupying Russian military forces?
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    Mr. DINE. For the most part, they are gone.
    Mr. CAMPBELL. For the most part? There still are some?
    Mr. DINE. For the most part, yes.
    Mr. CAMPBELL. There still are some, then, I take it? You just do not want to say for sure, because you do not know for sure?
    Mr. DINE. We can correct the record on that, Mr. Campbell, but for the most part, they are gone.
    Mr. MORNINGSTAR. Ambassador Collins can answer that tomorrow.
    Mr. CAMPBELL. I, for one, consider that a success of the housing program.
    Mr. Chairman, by my watch, I have 50 seconds left. I have no idea what that amber light means.
    Chairman GILMAN. It means you can make it.
    Mr. CAMPBELL. I have two questions left. I am going to try the most important one. Prognosticate because of the Chubais appointment. Privatization being his milieu, is this a positive sign? Do we expect to see things on the privatization scale work faster, more effectively because of Chubais' elevation in Russia, or do you not have that optimism?
    Mr. DINE. I think we cannot put all our eggs in one basket, but this is the man who has been the driving force. He has been the architect, along with Mr. Gaidar earlier in the decade for the economic reforms of Russia, which have been dramatic, significant, and for those of you who have not been to Moscow or St. Petersburg recently, if you would go you will see that those two countries are bustling with small entrepreneurs. Basically, Mr. Chubais has helped to free the entrepreneurial spirit that lies deep in the Russian soul.
    Mr. CAMPBELL. Thank you, Mr. Chairman, and thank you, witnesses.
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    Chairman GILMAN. Thank you, Mr. Campbell.
    Mr. Clement?
    Mr. CLEMENT. Thank you, Mr. Chairman. Ambassador Morningstar, Mr. Dine, good to have you here. Of a total of $4.7 billion in appropriated Freedom Support Act funds budgeted for the NIS as of September 30, 1996, roughly $3.8 billion had been obligated and $2.9 billion expended. What is the trend line in the expenditure rate? Mr. Morningstar, do you believe that you have reduced the pipeline for NIS funds?
    Mr. MORNINGSTAR. I believe so. One of the basic management tools that we have been using over the last 2 years has been to manage by the pipeline, to basically hold off as long as possible on obligations until the pipeline has been used up.
    As monies for the NIS have been coming down in total, the pipeline by definition is decreasing, because funds that were appropriated when there were larger funds being appropriated earlier on are being spent out and new funds are less.
    Now, one of the things that I always have to keep in mind when I look at the pipeline numbers, let me give you two quick examples. In Russia, there is a gap of $100 million between the budget number and the obligation number. That is an example, includes carry over from 1996 to 1997, that was obligated during the first quarter, and money that had been set aside for the enterprise funds.
    With respect to the pipeline between obligations and expenditures, although that number is coming down and it is something like $250 odd million with respect to Russia, something in that vicinity, there is always significant lag as to when those expenditures get posted. So, every time you look at a quarterly report or an annual report, it is inflated because that lag just continues on an ongoing basis.
    Mr. CLEMENT. Mr. Dine, do you have any comment on that?
    Mr. DINE. Well, I am just looking at my figures in front of me about obligations and expenditures, and as of the end of the fiscal year that ended September 30, 1996, 93 percent of USAID's available funds had been obligated, and 74 percent of the obligations expended.
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    The projections through fiscal year 1997, which we are currently in, show that 96 percent of USAID's available funds will be obligated, and 80 percent of the obligations will be expended. The pipeline represents approximately 18 months of expenditures, and that is well within USAID's guidelines as an agency. We are projecting fast turnaround. We are going as fast, certainly, as we can and the good news is that the bureau that I am responsible for is the fastest moving in the whole agency.
    Mr. CLEMENT. But, basically, this program uses well the money we provide, correct?
    Mr. DINE. Oh, I think so. In the wisdom of the Congress that put through the Freedom Support Act, you made sure that our programs would be technical assistance and training, and you can control those much better than you can otherwise.
    Mr. CLEMENT. Now that we have been in the NIS program for more than 5 years, what are the major lessons learned on what works and what does not work, and how does the Partnership for Freedom build on successful programs?
    Mr. DINE. Let me go first, because it is a natural evolution that we turn to Ambassador Morningstar. None of our programs are cookie cutters. You just do not do what you did in Russia in the Ukraine, or somewhere else. Each country has its own leadership, its own set of values, its own priorities.
    But, what we have seen is, if you do not privatize, if you do not change state-owned enterprises into private enterprises, the whole thing is not going to work. What we have seen is, privatization is working in Russia, it is working in the Ukraine, it is working in Kazakstan, Kyrgyzstan, Moldova for sure. It is slower in the other areas.
    The large enterprises are the hardest to dispose of. That is why I get back to Mr. Campbell's point about small entrepreneurs. Not only are they new people, not bogged down by holding onto enterprises they had been associated with in the Communist period, but they are the ones with the most gusto and the most verve in terms of going ahead in the new capitalist environment.
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    So, we would focus on the buildup of capital markets, which we have, the legal and regulatory environment being changed through the Parliaments, which we have, working with the banking system, bank supervision, bank training, turning these state-owned banks, which nurtured these ineffective and inefficient state-owned enterprises, into real commercial banks. Let business fall if the profits do not come in, or let them gain when the profits do come in. Then, finally, the small enterprises.
    Certainly in the democracy area, continue to build at the local level. I cannot emphasize that enough. It is at the local level that our strength comes as a society, and as these places turn themselves upside down, 180 degree turn abouts, they are learning that power resides at the local level, economically, politically, socially, not at the national level.
    Mr. CLEMENT. Ambassador.
    Mr. MORNINGSTAR. It is interesting. I think I have learned a few things in the last couple of years. I spent 95 percent of my life in the private sector, and I honestly did not come into this job with any predisposition with respect to the programs.
    I guess the few things that I have learned I think that are the most significant, one is that, although there is a place for large programs with respect to specific reform issues, I am finding that small programs tend to work very well; some of the ones that Tom Dine just referred to and has referred to in his testimony. The FINCA microlending program, some of the Eurasia small lending programs. Partnership kinds of programs, I think, do work very well.
    The second lesson is that we have to and we are continually emphasizing cost sharing. Nobody likes to, nobody pays much attention to what they get for free. If a Russian entrepreneur comes into a business center, that Russian entrepreneur or Ukrainian entrepreneur or Armenian or whoever it is ought to be paying part of the bill, because unless that person is paying part of the bill, they do not appreciate what they are getting. We, in fact, have been instituting that in our programs and the Morozov training program, for example, in Russia, that is now 40 to 50 percent cost-shared.
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    The third thing, and I really had no idea about any of these programs beforehand, I think exchanges and partnerships really do work. I was cynical when I came in, but I have met too many people who have participated in these programs and I have seen the effect that they have, and I have heard the excitement that they generate and how they talk about the effect it is going to have on their families, on their friends, and in the case of professional exchanges, on their business colleagues, when they return. I think we should be doing as much of that as possible.
    Chairman GILMAN. The gentleman's time has expired.
    Mr. DINE. Can I just add something, Mr. Chairman?
    Chairman GILMAN. If you are brief.
    Mr. DINE. I just want to pick up on what the ambassador just said. You know, the heart of the Marshall Plan was that kind of training, of bringing the French and people of other nationalities here. If you are an automobile planner in France, you then went to Detroit and lived with an automobile executive, and went to work with that person. We have started to do more in this regard.
    The more these folks touch and learn about us and pick up trust, the better off we are going to be. It gets back to Mr. Hamilton's point about what we are achieving.
    Chairman GILMAN. The gentleman's time has expired.
    Mr. Bereuter.
    Mr. BEREUTER. Thank you, Mr. Chairman. Gentlemen, thank you very much for your testimony and your responses. Mr. Campbell has rightly raised the question about the earmarking and the damage it does, and I think this House and especially the other body need to stop earmarking for domestic, political reasons and I think that is part of the problem.
    I am very concerned about how much of our Eximbank activities in the former Soviet Union are already in bad shape. I think very significant losses, and I am very concerned about the proposal to dramatically enlarge Eximbank's role in the NIS. I think that inviting or giving a green light to Iranians to come into Bosnia is the worst or the dumbest decision I have seen since I have been on the Capital Hill. While I do not have all the information, this looks like it is No. 2 to me.
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    I put four areas of questions in front of you and I know you are not going to have time to respond to these now, but I do want to put these questions on the record, to start with on Eximbank. Why did the administration wait until this month before briefing the International Relations and Banking Committees on this new Russian aid initiative through Eximbank in light of the fact they were first conceived and discussed by the Treasury last October? Is the administration willing to share the background papers and analysis that were used to formulate this initiative? Was the staff of Eximbank asked to contribute to the effort? What are the key objectives in this initiative? How will it meet U.S. national security concerns any more effectively than other assistance programs and providers now underway?
    Were other options considered, such as refocusing of Eximbank assistance to all the countries currently trying to lay pipelines and bring new gas and oil fields into production in the Caspian Region? Is the administration trying to reach target populations in sectors that are outside the purview of existing Eximbank programs in those countries? How exactly will Eximbank be used as an agent in this initiative? ''What is the exact meaning of a sufficient likelihood of repayment?'' This is a quote. Is this a lower standard of repayment than the ''reasonable assurance of repayment that is currently in place for all Eximbank obligators?'' How will Eximbank be able to operate in Russia and any other targeted countries with two different repayment standards in place?
    What other aid providers and vehicles were considered in place of Eximbank? In light of increased financial and personnel restrains on Eximbank, how will this initiative affect its ongoing programs in the CIS and the rest of the world? On what basis can this new initiative be justified for Russia and not for other countries, such as Haiti, Guatemala, Nicaragua or even Mexico, for that matter? What existing programs in the International Relations 150 account will be modified, reduced or eliminated to make way for this new initiative?
    Then, I noted that USAID recently transferred almost $9 million Freedom Support Act funds to the U.S. Treasury Department for stationing of about 28 resident advisers in eight of the newly independent states. That is on top of $30 million already that has been transferred to the Treasury Department over the past 5 years for these programs in NIS, a sum which may be supplemented by the Treasury Department budget support, as well.
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    I think this is a very expensive program. How does USAID evaluate its effectiveness and whether it will duplicate work by other AID contractors? Why do we need Treasury advisors placed in Budapest or earlier in Paris and London? I know the OECD and the European Bank for Reconstruction Development are there, but the executive directors are Treasury employees, and they should be paid for out of Treasury funds, and not out of the support funds.
    Finally, Ms. Lubin a couple of days ago in our subcommittee said that half a billion dollars went to four firms. I do not know if she is talking about in the central Asian Republics or all of the NIS. Three of them were among the Big Six consulting firms in this country.
    Ambassador Morningstar, you just said some things I agree with about getting better results oftentimes from some of the smaller programs. How can we justify a half billion dollars to four firms in the CIS, perhaps in just the central Asian Republic's work? You can take a stab at any of those you wish?
    Mr. MORNINGSTAR. I wish I had an hour to respond to them.
    Chairman GILMAN. You will have to be brief, Mr. Ambassador.
    Mr. MORNINGSTAR. I realize that. First of all, just very briefly, I do not understand a half billion dollars to accounting firms in central Asia, since our total budget for central Asia is a small fraction of that.
    Mr. BEREUTER. She must be referring to the CIS as a whole.
    Mr. MORNINGSTAR. Even the CIS, our total budget for the CIS is $625 million for 1997. I can guarantee you, there is not $500 million going to accounting firms or Big Six firms in the 1997 budget. We can straighten all that out, but I promise you that there is some misunderstanding.
    Let me address, at least briefly, the EXIM issue, because it is an important issue and obviously one that you are extremely concerned about and we are extremely concerned about. I am only advocating one thing, and I want to really make that clear, that we need and ought to spend money in the regions to help finance small business, and if possible, to bring in U.S. exports, as well.
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    When we looked at EXIM as a possibility to do that, and when it was originally suggested, there were some advantages to using EXIM, one being that you do get leverage, even if at higher risk at a higher subsidy rate. So, even if it is a 50 percent subsidy rate, you get basically double leverage, and it is a way to bring U.S. exports into the region.
    I understand the argument as to whether it is appropriate or not to use EXIM ''as a tool of foreign policy''. I can tell you, I felt that this was a program that was justified from the standpoint of the foreign policy need, that EXIM as an organization, with the right direction and the right focus, could accomplish this task. I also felt that it was important to be open and transparent about it, that I understand the basic EXIM mandate and the restrictions on the basic EXIM mandate, so I think at least there is an argument that if there is a strong foreign policy need, recognize it for what it is and make a wise appropriation under the Foreign Assistance Act. That was the intent. I understand the issues, and God knows, we do not want to get it messed up with reauthorization and I certainly understand that reauthorization of EXIM is critically important.
    I do want to emphasize that we can be flexible on this. If it is determined that EXIM is a non-flyer for some of the reasons that you talked about, we do have other alternatives. There are NGO's such as the one that Mr. Dine talked about, such as FINCA, Eurasia, that can do microlending, can do small lending in the regions. USAID has a small guarantee program. We can work through EBRD that is already doing some work with respect to small loans out in the regions. You do not get, necessarily, the benefit of U.S. exports as a result of doing that.
    But, if the goal is to encourage and help small business in the regions, there are different ways of doing it. EXIM has some advantages, but if that does not work out, we want to work with you to come up with other alternatives to do it, because that is the most important thing, helping the small businesses in the region.
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    Chairman GILMAN. The gentleman's time has expired. If you would be kind enough to provide any additional information pursuant to the request by Mr. Bereuter.
    Mr. Sherman.
    Mr. SHERMAN. I think I agree with you that it is important that the Ukrainians are privatizing 400 businesses a month or the Russians are finally sending some money to Bill Gates, but what people are most concerned about, at least who I talk to, is the threat of weapons of mass destruction.
    How certain are we that weapons of mass destruction have now all been brought into the territory of the Russian federation and that our programs to assure control or to assure a proper level of assistance to the Russian federation to provide for the control of those weapons are successful?
    Mr. DINE. May I make a suggestion, Mr. Sherman?
    Mr. SHERMAN. Yes.
    Mr. DINE. You are going to have Ambassador Collins here, I believe, tomorrow, and I think he would be the most appropriate person to address that issue in great detail.
    Mr. SHERMAN. The next question I have relates to the caucasus, particularly Armenia and Azerbaijan, where you seem to be suggesting that we cut aid to Armenia by $15 million and that we should increase aid to Azerbaijan by $15 million. First, why do you think it is necessary to cut aid to Armenia?
    Mr. MORNINGSTAR. I can try to answer that question. When we came up with the program, what we did is to try and objectively allocate how much money ought to go to each country. I might say that it is an unfortunate coincidence, but, in fact, a coincidence, that Armenia went down $15 million and Azerbaijan went——
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    Mr. SHERMAN. It is a coincidence that seems exact, except for the rounding error.
    Mr. MORNINGSTAR. If under oath, I would testify that that was a coincidence. But, in any event, be that as it may, what we tried to do is look at what would be a fair allocation with respect to the countries.
    Armenia has far and away the largest per capita amount of assistance in the NIS, $27.50 per person, compared to $5 a person for any other country. I am not saying that the assistance is not deserved. There have been issues over the past year, but certainly, the assistance is deserved. They have serious refugee problems. We have basically kept Armenia alive and I think they would concede that, through our humanitarian assistance.
    But, as we worked out the numbers, that is what came out to be fair numbers. Now, one could argue, why should Georgia receive only $40 million and Armenia $80 million, you know.
    Mr. SHERMAN. Mr. Ambassador, the idea that fairness means taking money away from a country that is under blockade and giving it to the country that is doing the blockading strikes me as an odd notion of fairness, and perhaps one that we could persuade——
    Mr. MORNINGSTAR. First of all, the money that goes to Azerbaijan——
    Mr. SHERMAN. I know it goes to NGO's, but it goes to NGO's, in effect, relieving the government of its own social welfare responsibilities and providing it with the resources that unfortunately seem dedicated to blockading——
    Mr. MORNINGSTAR. No, I would argue that it goes to Azerbaijan to carry on activities that just wouldn't take place. As a result of our ability to do more with respect to PVO's and Azerbaijan because of the report language, we were able to go into some of the refugee camps and literally repair tents and create shelter that just would not have existed. We saved lives in Azerbaijan because of that. I have no issue, no question with respect to that.
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    Mr. SHERMAN. I see the yellow light. I have to go onto my last question. I hear your passion.
    The Japanese save a lot on defending their worldwide trade routes because they say they have a peace provision in their constitution. They save a lot on aid to Russia because of a territorial dispute. What are our chances of at least getting Japan flush with all these savings, and I am sure, filled with a sense of fairness, a desire to spend that money on international affairs, to match our $650 million in aid to those newly independent states with whom they do not have a territorial dispute?
    Mr. DINE. Mr. Sherman, it is a good question. I do not have a good answer for you, because as you mentioned, the Kuril Islands dispute continues. I can tell you that last week in Honolulu, there was a major conference of the Japanese aid officials and our own on more collaboration, more cooperation in Asia as well as Africa. That kind of dialog with the Japanese will continue, and they are going to put more in as they go along.
    Mr. SHERMAN. The willingness of Japanese officials to visit such oppressive locations as Hawaii is something that is gratifying, but I wish they had an equal interest in sharing the burdens of international affairs.
    Mr. DINE. I think they are sharing the burden now in Peru, in more ways than one.
    Chairman GILMAN. The gentleman's time has expired.
    Mr. Ballenger.
    Mr. BALLENGER. Thank you, Mr. Chairman. I would like to ask a couple of questions. First of all, having worked in Central America for a long time and witnessed the small business loans that we have givven to NGO's, which are fabulously successful, do we have a record of the repayment schedule, or how well it is working? Somebody asked earlier about this, if they repay their loans, does that not regenerate the money that you can use over and over and over again?
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    I notice that FINCA and a couple of others have been doing this for a couple of years. Do they have a repayment schedule where they are getting their money back? In other words, if you are going to give them $225 million each year for the next 5 years, somewhere along the line they need less because the money that they give is coming back. They would need less, assuming 100 percent repayment. I know Nicaragua gets close to 97, 98 percent.
    Mr. MORNINGSTAR. It is close. I agree, and what we are finding in the NIS, particularly on the microloans and very small loans, it is very close to 100 percent.
    But, what we also need to do, and I think it is critically important, is to expand those programs. For example, Mr. Dine, in talking about FINCA in Kyrgyzstan, talked about the fact that so far, yes, they have done something like 20,000 small loans for $500,000 or $600,000. They could be doing a lot more in Kyrgyzstan, and then we could be moving that somewhere else.
    Mr. BALLENGER. What I am asking, if they have 25,000 loans there and we are investing in the future of this country, what are they getting back? Are they being repaid?
    Mr. DINE. Exactly. Let me speak up, not only about FINCA in Kyrgyzstan, but also Opportunity International in Russia. I will even go across the border here today into Central Europe, where the Polish American Enterprise Fund has a microenterprise program, and we have one that is flourishing in Albania. Every one of those programs has about a 98 to 99 percent payback.
    Mr. BALLENGER. Well, I will accept that.
    Let me ask you another question, because we have talked about Eximbank, how are we lending money? We are needing money to invest in those countries.
    It is my understanding that GAZPROM owes $3 billion in taxes to the government, and yet, we are guaranteeing loans so they can expand their shipment of natural gas into Europe. Does it not make sense that somewhere along the line that they ought to pick up some of their own load? The ARS is the same way in diamonds, because they do not seem to be paying taxes to the government? They are taking funds from us to generate more money for themselves and yet not paying to their own government what they are supposed to pay.
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    Mr. MORNINGSTAR. I would respond in this way. That is one of the reasons why we suggested that EXIM do the program that we are suggesting as part of the partnership, as part of the Partnership for Freedom. There have been instances where there has been criticism of EXIM loans because they have provided financing to big American companies where the activities were at least arguably not developed in the private sector; whether in Russia through some of the loans there, whether in Ukraine through some of their big agricultural loans.
    What we were trying to do with respect to this program is to focus EXIM in an area where there was a real developmental need to develop small business and develop in the regions, and sharply focus them using foreign assistance money.
    So, ironically, at least what our intent was was to meet some of the questions that you——
    Mr. BALLENGER. Is it necessary to fund these great, big organizations? Do we not have any clout in saying, fellows, now that we have helped you get as big as you are, we think it would be great if you pay your own taxes to your own country so that you can generate your own economic development?
    Mr. MORNINGSTAR. We are doing that in two ways, one by trying to work through all of the issues with respect to tax reform. What we are also trying to do, an example being in Ukraine right now, to avoid the issues—you talked about the GAZPROM issues, there are similar issues in Ukraine, to try and pre-empt the issue that you are raising, by designing the deals in a way upfront that meet objections. Hopefully, we will be successful and do that.
    The problem with the EXIM mandate is that if somebody comes in with an application under their basic program and all of the eligibility requirements under that application are met, they have to go forward with the loan.
    Mr. BALLENGER. Thank you, Mr. Chairman.
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    Chairman GILMAN. Thank you, Mr. Ballenger.
    Mr. Capps.
    Mr. CAPPS. Thank you, Mr. Chairman. I want to thank both of you for your testimony and for your excellent papers. I think one of the decisions we make about the effectiveness of these programs depends directly upon how well they are being accepted by the people that they are designed to assist.
    I only have one question. I want to preface it by referring to an experience I had at the state university at Khazakstan back in 1988, when I had the privilege of lecturing there at Almaty. Before, I was trying to describe the American world view, sort of in contrast to what I saw going on there, but I was trying to do it in ways that would not be resisted.
    The first questioner prefaced his question by saying, we are a country that uses proverbs. He said, the proverb I would like to cite for you is the following. When you enter a monastery, you cannot expect to abide by your own rules.
    I have to say, I was so tantalized by that proverb that I did not really focus on what the question was, because I thought he had already made his point.
    My question to you is, we are dealing with countries that are going through profound social and cultural change. We know that while all of this is going on and while our aid programs are working effectively there, there is also a tendency to increase nationalistic, sort of patriotism identity. Our programs will only work if they are accepted, if they are adapted to the world view of the people who live there.
    I think that the testimony that you have provided provides examples that this adaptation is working well, but I just want to ask you directly, are we getting resistance at all? I mean, do we know that the people want what we are trying to provide for them? I guess I was particularly taken by the references to the increase in faculty exchanges to public policy centers, things of that kind.
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    In those places, are these topics being addressed by an indigenous population?
    Mr. DINE. I would say yes, in many different ways. First of all, we cannot do a program in any of these countries unless the leadership wants those programs. Now, you can ask the question, is the leadership in tune with the population? As long as we have democracy, which we do for the most part—not always—then that is a pretty good indicator.
    But, in my experience so far, and I am sure Dick will have his experiences, people want more. They do not want less, they want more, because they see how much needs to be done. To go back to the point that you made that you at one point gave lectures in Almaty, we have set up a management school there. We have helped to fund it, teaching modern market economics.
    Well, in the curriculum of Kazakstan, starting at kindergarten, slowly but surely, they are turning it around, because these folks do want what they see now on television. It is no longer listening surreptitiously to the Voice of America or BBC. They are seeing on cable television what they want and they want jeans and music, jeans and jazz, if you will, but they also want the value systems that we have come to accept and assume.
    So, I would say that the problem is expectations, not acceptance. Yes, it is accepted. In the Russian election in July, 40 percent voted for the Communist candidate. You could say that 60 percent, therefore, in voting for Yeltsin, did not want the Communist candidate and wanted reforms, even though they are extraordinarily painful, and these are very, very difficult times for a middle class that has not grown as much as we would like yet.
    But, you know, one of the main objectives of the program that we have been talking about this morning, the Partnership for Freedom, is to use native talents more and more. I think they welcome our assistance. They welcome our talents and they welcome our style, if you will.
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    Mr. MORNINGSTAR. I would just add this. It is more than just a question of whether the governments support or do not support a program. I think that part of our job is to create as many democracy supporters and to support those people as best we can in all of these countries.
    I think that includes, just to give two examples, Kazaksten. We would like to increase our assistance to Kazaksten, Kazaksten as well as Uzbekistan, are very important from a geo-political and from a commercial standpoint. But, there are real democracy issues there. I think as part of our program, we need to have human rights programs. We have one there now, we need to have more.
    I was also struck by Mr. Yavlinsky, whether one supports or agrees or disagrees with all of the stands that Mr. Yavlinsky, the leader of the Yabloko Party in Russia may take, he made a very compelling statement. Do not leave us. Do not take away your support for political parties. We need that, we need the symbolism, we need the help. Part of what we are trying to do under Partnership for Freedom is to support the people who want to build democracy and to create the relationships that will do so.
    Chairman GILMAN. The gentleman's time has expired.
    Mr. Manzullo? I am sorry. Mr. Graham.
    Mr. GRAHAM. Thank you, Mr. Chairman. I had some questions about the plutonium disposition plans between the Russian Government and the U.S. Government. Is that better left for tomorrow?
    Mr. MORNINGSTAR. I am not sure whether Ambassador Collins is the best person to answer it, but I know I am not.
    Mr. GRAHAM. OK, fair enough. Along the lines of what the gentleman just asked you about the acceptance of what we are trying to do by the population, in July, what percentage of the Russian population actually voted?
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    Mr. DINE. About 70 percent.
    Mr. MORNINGSTAR. Yes, it was a significantly higher percentage than here.
    Mr. GRAHAM. So, obviously, people are getting into this. The 40 percent that voted for the Communist Party, do we have any indication of why that is?
    Mr. MORNINGSTAR. My view is that they were voting their pocketbooks, and they were voting no differently than people vote in other countries. I do not think, in many instances, I am sure it was not simply a nostalgia for communism, it was a feeling that they were not being taken care of and that they wanted change in order to have a better, at least in their view, what would be a better life.
    Mr. DINE. I would also add that they were voting on the direction of policy. We have heard many times before that the Russian Far East, particularly the leading city of Vladivostok, was anti-government, anti-Yeltsin, pro-Communist. As it turned out, they decided that Zhirinovsky's, excuse me, Zyuganov's message was not their message and they voted for the incumbent. So, that was quite an upset in terms of what the Communists had expected.
    But, Dick is correct. If you look at the way the voting patterns go on a map of Russia, you will see red come up in certain, particular areas.
    Mr. GRAHAM. Given the economic conditions as exist today in Russia, do you think the Communist party's campaign platform for the future has been strengthened or weakened?
    Mr. DINE. Only time will answer that. I do not see how it has been strengthened. When the leader of the Communist party and the candidate of the Communist was here a month and a half ago, I do not think many of us who heard him speak at various fora in Washington, DC found him very impressive. I do not think he learned anything from that election.
    Mr. GRAHAM. Well, from what I am gathering, economic times are not so good in Russia, and if I was a Communist candidate, it seems to me that maybe the appetite is stronger rather than weaker for security, pocketbook wise.
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    Mr. DINE. Let me just add a comment to that. Again, I am looking across into central and eastern Europe. The issues are not always the pocketbook. The issue also is competence. The new style reformists came in, they were thrown out by the electorate. Poland is a good example, and Lithuania, and other places.
    The former Communists came into power, they were thrown out by the electorate. You have to step up to the plate and hit the ball and bring these people into the 21st century, otherwise the electorate now will throw you out of office. Pretty important message. I think you get it down there in South Carolina, as well.
    Mr. GRAHAM. Right, absolutely.
    Mr. MORNINGSTAR. I guess I would answer this way. If you accept the premise that the vote last summer was not a vote for communism but a vote for something different, I think that if the elections were held today, there would still be a significant vote for something different.
    I think it would probably be less likely that that would be in the form of voting for a Communist candidate. It may be in the form of voting for a General Lebed or some other candidate, but I think that there would be a significant vote today for something different, for the same reasons, pocketbook issues.
    Mr. GRAHAM. What percentage of the Russian Duma is made up of Communist members?
    Mr. MORNINGSTAR. Percentage of Communists?
    Mr. DINE. Well, it is the leading party in the Duma and the Yeltsin Government, the Chernomyrdin Government have to deal with it every day. They are the ones who screamed when they heard that Chubais was going to become the first Deputy Prime Minister of the Economy.
    Mr. MORNINGSTAR. I know these are much better questions for Ambassador Collins.
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    Mr. GRAHAM. OK, thank you.
    Chairman GILMAN. The gentleman's time has expired.
    Mr. Hilliard.
    Mr. HILLIARD. Thank you very much, Mr. Chairman. I have three questions, Mr. Ambassador. The first one, dealing with trade and investments, I understand that the United States has three enterprise funds in the NIS. From the track record, I understand that the Central Asian fund is performing fairly well, but that the Russian fund and the western NIS fund are performing very slowly and the operating expenditures of the western NIS fund is very high, something like 52 percent.
    Why is it so high and what is the outlook on these funds, and why is the Central Asian fund performing so well and the other two are so lackadaisical?
    Mr. MORNINGSTAR. The Central Asian fund, if the measure of success is the percentage of money that has actually gone into projects in a shorter period of time, the Central Asian fund would be the most successful. I think the reason that is the case is that the CEO of that fund is a person who had spent several years in Central Asia prior to the creation of the fund, and has been living in Almaty and has just a terrific knowledge of the area.
    The other funds, certainly on a percentage basis, are going more slowly. The issue that all of these funds face is the dichotomy between getting money out the door and doing projects, but also doing projects that they feel at least have a reasonable chance of success, because they certainly do not want to be in a position where it is believed that the fund is, in effect, giving out handouts and that would be sending the wrong message. There has to be a reasonable business plan, there has to be a reasonable chance of success.
    That is not to say that those other funds cannot be working faster, and we are working with them. We are setting up performance measures, we are working with them as to how they might not change, but refocus their policies, so that there is a greater likelihood of success. I would point out that these funds are only 3 years old. None of the central and eastern European funds at the age of 3 years had made significant investments. Even the Poland fund, which is supposed to be the most successful, had virtually gotten nothing out over 3 years.
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    With respect to the operating expenses, USAID particularly, but also our office, does monitor very closely the operating expenses with any fund, private, public, whatever, the operating expenses by definition are going to be a higher percentage during the early years of the fund when investments are low, and hopefully that will straighten out.
    We do not see any outrageous operating expenditures. In fact, the consolidation of the two Russian funds a year and a half ago significantly reduced overall operating expenses.
    Mr. HILLIARD. Where are we on judiciary reform in Russia and on tax reform, and is there any cross-reference between the enterprise funds we have set up and the tax reform and judiciary reform? What I am really asking, those persons who do not pay taxes, are they eligible for new loans? Are they looked at in terms of the loans they have outstanding? Are those persons who break the laws, are they allowed to get loans? How is the judicial reform working, or is it working?
    Mr. DINE. I go back——
    Mr. HILLIARD. I am speaking specifically now in Russia, because I understand that the Minister of Justice has resisted judiciary reform.
    Mr. DINE. Well, there has been judicial reform in Russia. USAID, since 1993, has led the international donor community's effort in helping the judicial reformers move ahead.
    Key laws have been drafted and passed the Duma, the previous Duma as well as the current one, and we have helped in drafting executive decrees that have again helped to reshape Russian society, particularly its legal and regulatory framework. So, much of our effort also has gone into commercial laws. You cannot have a friendly business environment without friendly business laws in terms of what businesses can and cannot do.
    Mr. HILLIARD. Now, independent judiciary, so tell me, how independent is the judiciary?
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    Mr. DINE. Well, we have worked with judges. We have worked with a system that was heavily weighted in favor of prosecutors. An enormous number of judges and lawyers have been trained in Russia as well as outside of Russia, including here. We have helped those Russians who want to put in a trial by jury system. It frankly has not worked as well as we had hoped, but bringing back jury trials to Russia, which have not existed since the turn of the century, and then the Communists stopped them, has been important, and it gives people a better sense of what they can and cannot do. It empowers people.
    So, we are linked—independent judiciary is a goal, but again, with limited funds—limited because they went down drastically after 1994's big year and then the rise of earmarks, we have not been able to do as much in the independent judiciary area as we would like.
    We have created a private legal reform institute. We have, as I indicated, helped to encourage Russian lawyers to learn about the outside world and hopefully, we have helped to set up some institutions that will be sustained over the years ahead.
    Chairman GILMAN. The gentleman's time has expired.
    Mr. Manzullo.
    Mr. MANZULLO. Thank you. I appreciate your testimony.
    Mr. Ambassador, I have a copy of your testimony in front of me, and I am sorry, I was at another hearing and did not have the opportunity to hear, but I am really, well I do not know if the word is disturbed or perplexed or whatever it is, but on the bottom of page seven, you state, ''The fiscal year 1998 request for $900 million is a 44 percent increase above the current fiscal year's budget for the NIS.'' Do you see it there, Mr. Ambassador, the last paragraph on the bottom of page seven?
    Mr. MORNINGSTAR. The statement is correct. I am still trying to find it in the testimony. OK.
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    Mr. MANZULLO. You know, part of that includes, it says, ''The level of funding will be able to support more than double the number of exchanges and partnerships.'' Two years ago, we had, and some of the folks here remember, we succeeded in cutting $20 million from the exchanges that were funded through the State Department. Over all, I think there are 22 agencies that spend somewhere between $2.5 and $3 billion a year on these exchanges, and these are very generous.
    Kids come over from Russia. We pay for their air fare, we pay for their housing, we pay for their food, their transportation, and they stay over here a period of time and engage in dialog and they go back home. I had one of those young people in my office and it was very beneficial. But, hot dog. I cannot sell this back home, when people there are fighting to get their kids through college and then you ask for a 44 percent increase. I mean, that is not going to sell back home, and you have to be a lot more conservative in your estimates than to come in here and ask this committee to increase almost half the amount of spending that is going on.
    Mr. MORNINGSTAR. Let me respond on the exchange issue. The total, the 44 percent is the total number.
    Mr. MANZULLO. Right.
    Mr. MORNINGSTAR. With respect to exchanges, we have made a concerted effort to reduce the costs of the exchanges and, in fact, in general, they are about half the cost of what they used to be. The reason that they are, are the kinds of things that you are talking about, that you were just talking about.
    For example, on many of the community-based professional exchanges, where, for example, ten bankers from some Ukrainian city would go to Cincinnati or would go to wherever, you name it, the cost is shared. In most cases, they pay their own plane tickets. There are home stays in the United States, it becomes a community effort.
    I understand your concern from the standpoint of, if people look at the question in the abstract, and say, well, why should we be doing this? You should be paying my kid's tuition to college.
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    Mr. MANZULLO. Well, they look at it in the pocketbook, not in the abstract.
    Mr. MORNINGSTAR. No, I understand that, but they are looking at the issue without having been touched by it. The people in this country, I think, who have been a part of it, recognize its value, and the point is that these kinds of programs, I would argue, if we could spend five or ten times as much on exchanges, we ought to do it. The reason, again, is because it is in our interest to have people back in those countries who have had that experience and assume positions of power and are going to influence how those countries act, looking out over 10 or 20 years. I think it is an investment in our future.
    Mr. MANZULLO. Mr. Ambassador, you know, we do not spend in Congress, we invest. We do not use the word spend anymore. When we are talking about dismantling nuclear warheads that are aimed at us, that is an investment. It is a safety issue. I voted for the State Department appropriations and for foreign aid, but the mood of the people of this country is that there are cutbacks occurring everywhere.
    I would very strongly suggest that you do not come before this Congress and ask the good people of this country to pay more taxes, to spend more money, to bring over more students from Russia to study in this country. Because, to the folks back home who are struggling to get their kids through college, this does not even make sense. I am not even talking about the value of the programs. I am talking about the cost of it.
    I would suggest that if you want a foreign aid package to pass this year, that you do not spend one dime more than you did last year, because the way the Members of Congress are looking at appropriations bills, if it spends more than the year before, they are going to be inclined against it. I would take that as a rule of thumb on presenting these packages before this body.
    I do have a request and I know I am out of time. What I would like and perhaps the document already exists, is if somebody could prepare or furnish me a copy of a document that states what programs are in effect to the NIS, the levels of funding and a general idea that if somebody calls in and says, Congressman, what type of foreign aid in the generic term are we giving to Russia and the NIS, that I would be able to simply give them a copy of that document. Could you do that for me?
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    Mr. MORNINGSTAR. We will supply that.
    Mr. MANZULLO. I appreciate that. Whoever does that, when you call my office, please ask for me directly, so it does not get buried on a staff table and I have a very enlightened staff, and I am still waiting for the document. If you just leave the message personally, I will return the phone call.
    Chairman GILMAN. The gentleman's time has expired.
    Mr. MANZULLO. Thank you.
    Chairman GILMAN. Mr. Pallone.
    Mr. PALLONE. Thank you, Mr. Chairman, and I appreciate the opportunity to participate in your hearing. I will certainly try to be brief.
    Let me just say that I was very interested in the all the statements that were made about the former Soviet Republics. Unlike the previous speaker, whom I admire a great deal, I do think that your request for an increase in the amount of funding makes sense.
    The main reason that I am here today, though, is because I co-chaired the Congressional Caucus on Armenia Issues with Mr. Porter from Illinois, and I am very disappointed with the fact that even though you are talking about a total increase for the former Soviet Republics, you are actually trying to cut back on the amount of money that is earmarked to Armenia.
    I recently went to Armenia and also to Nagorno Karabakh about a month ago, and I have to say I was very much impressed by the need, if you will, for continued U.S. support to establish democracy and also to increase the movement toward a market economy. It was particularly interesting to hear, I guess Mr. Dine in his statement talked about Armenia has made strong progress toward developing a market economy. Ambassador Morningstar said that Armenia is doing quite well in terms of economic reform, and I think in response to Mr. Sherman, the ambassador also said that the aid to Armenia was important to keep Armenia alive.
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    So, in many ways, the two of you have sort of stressed the same things that I was going to stress. Then, you know, to hear you say at the same time, well, Armenia is getting too much and we want to cut it back by $15 million is really a disappointment. I understand that you are saying you are looking at it in the total context, that you are not necessarily opposed to aid to Armenia and that is good to hear. But, I have to say that many of my congressional friends of Armenia really think that the earmark should be at least what it was last year, not the $80 million that is proposed, but the $95 million that we did get, and we are going to continue to work for that in front of the Appropriations Committee.
    I know I do not have a lot of time, but I wanted to just stress, if I could, two things and just ask a question briefly. I had to mention the Republic of Nagorno Karabakh. I was there for a brief time, for 2 days, and I really do not understand why the Armenians of Karabakh are not deemed worthy of U.S. assistance, particularly since Azerbaijan has received about $100 million in support from the United States. Again, I have been urging the State Department to modify its policy, providing humanitarian aid to Karabakh. It clearly is needed. Having been there for 2 days only, I can tell you there clearly is a need for that humanitarian assistance to Karabakh.
    You know that last year, in the version of the Foreign Operations bill that passed the House, we had a compromise that would provide U.S. assistance to both Azerbaijan and Nagorno Karabakh, based on a fixed ratio. Unfortunately, that provision was taken out in conference. It is my hope that we can move toward providing humanitarian aid to all who need it, regardless of ethnicity.
    I wanted to ask you a question. In light of your saying that the administration actually wants to increase assistance to Azerbaijan, what about modifying our position with regard to providing U.S. support to Karabakh? How do you feel about that?
    Mr. MORNINGSTAR. I understand your concerns, and in part, as a result of your trip, and also, the request from the government of Armenia, we are looking at the needs requirement for Nagorno Karabakh and we are looking to confirm your view that those needs, in fact, are not being addressed. The real issue, I take it, is medical assistance in that area, not so much food and the like.
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    Having done that, I think we do have to at least look at the issue as to what we can do. We are presently working through the International Red Cross. We have to determine whether that is sufficient or not. If it is not sufficient, is there a way to delink the humanitarian assistance to Nagorno Karabakh from political considerations, similar to what was done in the report language in connection with Azerbaijan? We are, in fact, looking at that.
    Just one comment, maybe to my regret in even bringing it up, with respect to the dollars to Armenia. I do think that it is important to recognize that, for example, the $95 million that was earmarked in 1997, translates out to actually, we are talking about $150 million of real assistance. That is because the Freedom Support Act does not include USDA help and the value of commodities.
    Likewise, the request for 1998, the $80 million would translate out to $140 million of overall assistance. Do not forget that the actual number prior to the congressional earmark in fiscal year 1996 was something like in the $50-odd million range. So, it is still significantly more than it was 2 years ago, and the overall amounts that go there are pretty significant.
    Chairman GILMAN. The gentleman's time has expired. Thank you, Mr. Pallone. I want you to know that a number of us serve on the Armenian Caucus with Mr. Pallone, and we are generally supportive of assistance to Armenia.
    I am concerned about the impact of section 907 at this point. Let me just ask one last question. Section 907 of the Freedom Support Act prohibits U.S. aid to the government of Azerbaijan until the blockade with Armenia is lifted.
    In the interim, however, our Nation is prevented from cooperating with Azerbaijan on narcotics and international crime issues, or for cooperating on democratization programs with Azerbaijan. Are any other important U.S. programs prohibited by provisions of this law?
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    Mr. MORNINGSTAR. Well, I think that the statements that you just made are very important. Ambassador Collins will talk tomorrow about our overall position with respect to 907. Let me just briefly talk about its effect on the program.
    Chairman GILMAN. If you would, quickly. We have the President of Egypt waiting for us.
    Mr. MORNINGSTAR. I will be very quick. Part of the problem was solved last year by being able to do humanitarian assistance now through the government, which has proven to be effective. But, you are absolutely right.
    Section 907 would prohibit work on anti-narcotics. Section 907 would prevent many democracy-building activities, for example, bringing reform-minded government members over on exchanges, whatever the activity may be. We are not able to sit now on committees that would help the Azerbaijan.
    Chairman GILMAN. How do we correct that?
    Mr. MORNINGSTAR. Well, one way is to repeal the whole thing.
    Chairman GILMAN. Without repealing the whole thing, can we get a waiver?
    Mr. MORNINGSTAR. If repeal of the whole section is not appropriate at this point in time, we can have further carve outs like happened last year in the conference report language with respect to humanitarian——
    Chairman GILMAN. These items.
    Mr. DINE. Mr. Chairman, if I could add just one quick note?
    Chairman GILMAN. Yes, Mr. Dine?
    Mr. DINE. If we were allowed to work with the government of Azerbaijan, then we could work on privatization. We could help to build a modern market economy, which would not only affect the peoples of Azerbaijan, but also the neighbors in Georgia and Armenia.
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    Chairman GILMAN. I want to thank our witnesses. Without objection, the chair and ranking member will join in submitting some questions for response in writing from both the State Department and USAID.
    Let me just say that we have encountered some serious delays in getting such written responses in the past. I hope that responses will be quickly forthcoming. The hearing is now adjourned.
    [Whereupon, at 12 p.m., the committee was adjourned.]