CURRENCY Committee on Banking and Financial Services
James A. Leach, Chairman
For Immediate Release:	Contact: David Runkel or
Wednesday, November 1, 2000	Brookly McLaughlin at 226-0471

Floor Statement
Of Rep. James A. Leach
Chairman, House Banking and Financial Services Committee
GAO Report on International Efforts to Aid Russia’s Transition Have Had Mixed Results

Mr. Speaker, in June of 1998, the Banking Committee held a series of hearings on financial instability around the world, including Russia, whose economy was soon to be devastated by the collapse of its domestic bond market and a devaluation of the ruble. Afterward, I asked the General Accounting Office to conduct a study of the effectiveness of U.S. and other western assistance in facilitating Russia’s transition from a failed communist-style command economy to a modern market economy. The Committee’s ranking member, John LaFalce, joined me in that request.

The GAO has now completed its work, and the findings are disturbing, indeed dispiriting. Between 1992 and September 1998, the United States and the West -- including the International Monetary Fund, the World Bank and the European Bank for Reconstruction and Development - provided some $66 billion in assistance to Russia, not counting food aid, trade credits and debt rollovers. Of this, the U.S. contributed $2.3 billion in bilateral grants under the Freedom Support Act to address humanitarian needs and support economic and democratization reform. According to the GAO, far from putting post-communist era Russia on a course of prosperity and stability, these funds were largely wasted. "Russia’s economic decline has been more severe and its recovery slower than anticipated," the GAO report notes. "Progress toward reaching broad program goals has been limited."

The assistance was, in fact, worse than wasted. Because donors lacked a clear strategy and coordination, as the GAO observes, the money which was virtually thrown at Russia contributed to the spread of a culture of corruption and the concentration of some of the country’s most valuable economic assets in the hands of a handful of oligarchs who operate on the margin of, if not all together outside, the law. These politically powerful economic groups have had little interest in reform. Thus, to a significant degree, western aid programs were not only ineffective; they provided fuel to groups that opposed reform.

Consider the Russian banking system. Donors recognized that an efficient and competitive financial system was a basic need if the economy was to prosper. To this day, however, 8 years after the collapse of communism and the breakup of the Soviet Union, Russia does not have a banking system worthy of the name. There are more than 1000 banks in Russia, but their total assets are only about $65 billion - the level of a mid-size provincial bank in the U.S. This is because the Russian public does not trust these institutions. Most of these banks, particularly the small ones, exist as money laundering platforms to help their clients evade taxes, duties and other legal requirements and to spirit capital to overseas havens. More than $100 billion has fled the country, and some estimates place the amount much higher.

The GAO analysis released today underscores an unfortunate but inescapable conclusion: the United States and the West missed one of the great foreign policy opportunities of this century - to bring Russia into the Western family of nations, politically as well as economically. Despite the aid, Russia's economic decline was among the most severe and its recovery among the most limited among transition countries in Eastern Europe and the Soviet Union. Many Russians have concluded the West deliberately impoverished their country. Today only 37 percent of the Russian people have a favorable view of the U.S., down from 70 percent in 1993.

Among the key findings of the GAO report:

• The U.S. and the West failed to object strongly to the corrupt "loans for shares" privatization scheme that consolidated the business empires of Russia's "oligarchs."
• Russia's primary motivation in borrowing from the IMF was less to stabilize and reform its economy than to become eligible for debt relief from the U.S. and other creditor countries through the Paris Club.
• The IMF was pressured by key shareholders to support new loans for Russia in 1994 and 1996 in an effort to demonstrate U.S. and Western political support for President Yeltsin.
• Despite compelling evidence of an absence of the rule of law and massive governance challenges, explicit anti-corruption efforts have represented a relatively small share of international assistance to Russia.
• Little or no progress has been made in strengthening Russia's banking and financial system.

The recent rise in world oil and commodity prices has improved the trade balance of Russia, but continuing capital flight indicates major legal reforms have yet to occur. As a result, the business climate in Russia is still unfavorable. In a recent strategy review, the EBRD concluded, "Severe weakness in the rule of law continues to undermine investment... The power of vested interests to hold back critical reforms must be effectively checked. Standards of corporate governance need to be strengthened. Without demonstrable progress in these areas, Russia's impressive recovery is not sustainable."

Despite these failures and frustrations, the U.S. cannot afford to remain uninvolved with Russia. Stretching across 11 times zones - twice the distance from New York to Honolulu, almost halfway around the world - Russia is a country without which no serious international issue can be resolved.

In recent years, some progress has been made in nuclear weapons reduction and security, and in April Russia finally ratified the START II agreement. But many other problems remain. Among them is Russia's decision to build nuclear reactors in Iran and transfer missile technology to that country.

In this context, the recent revelations that the U.S. and Russia had entered into a secret agreement to allow Moscow to continue arms to Iran are especially troubling. It would appear that the Clinton-Gore Administration, in its relations with Russia, chose to abandon the principles of progressive diplomacy established at the beginning of the century by Woodrow Wilson in his demand for open covenants, openly arrived at.

The still secret Gore-Chernomyrdin agreement not only flouted law, but also failed to safeguard our national interest and security. In what amounted to an inverted arms-for-hostages deal, U.S. policy was, in effect, taken hostage by a Russian arms strategy designed to destabilize the Middle East.

The agreement’s apparent purpose was to facilitate a Russian aid policy that resulted in the squandering of American tax dollars for the benefit of a kleptocratic elite, rather than the Russian people.

The legitimization of Russian arms sales in defiance of law is hardly in the interest of a safer world. The naiveté of this approach is matched only by the perfidiousness of its execution.

From an American perspective, it would appear that one of the purposes of the Gore-Chernomyrdin Commission may have been to burnish the Vice President’s foreign policy credentials and make his management of U.S.-Russia relations a centerpiece of his potential campaign themes. It is now self-evident that U.S. policy failed, and the Gore-Chernomyrdin Commission is a symbol of that failure.

The question is how the U.S. and the next Administration should proceed from here. Though isolationism is always at issue in our democracy, the American tradition is dominated by pragmatic and compassionate internationalism. Most Americans recognize that what happens in Russia, still a nuclear superpower with a seat on the UN Security Council, is profoundly important to our national security. A peaceful and democratic Russia remains a compelling U.S. interest. Consistent with the strong humanitarian strain in our foreign policy, Americans maintain an interest in helping the Russian people achieve a market economy based on the rule of law.

America need not turn its back on the international financial institutions, but it has an obligation to see that taxpayer resources are not squandered, nor used to enrich the few at the expense of the many. Americans should continue to be prepared to support genuine Russian efforts to help themselves. Here, it must be understood that Russia’s economy will remain hapless unless the Russian government begins to deal effectively with corruption and takes the necessary steps to establish an intermediary financial system that serves a saving public, instead of a thieving elite.

No nation-state can prosper if it lacks a place where people can save their money with confidence and seek lending assistance with security. Russia, which is the land mass most similar to our own, has been kept back for most of this century by the Big "C" of Communism and is now being kept back by the little "c" of corruption - which may prove more difficult to root out than Communism was to overthrow.

What the Russian people - and those of so many developing countries - deserve is a chance to practice free market economics under, not above, the rule of law. If attention is paid, above all, to establishing honest, competitive institutions of governance and finance, virtually everything else will fall into place.

Unfortunately, over the past six or eight years the basics of law and economics have been ignored for the sake of the politics of expediency and neither the national interest of America nor Russia has been advanced by a mistargeted and mismanaged aid program.

It is time that the symbiotic statecraft symbolized in the Gore-Chernomyrdin relationship that has legitimized and ensconced crony capitalism in Russia be brought to a halt. It is time for the American people to insist that their leaders concern themselves with the plight of the Russian people rather than the well being of a new class of kleptocrats.

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