September 21, 2000    
This Date's Issues: 4529  4530   4531

Johnson's Russia List
#4529
21 September 2000
davidjohnson@erols.com


******


Excerpt
[http://policy.house.gov/russia] 
RUSSIA'S ROAD TO CORRUPTION
How the Clinton Administration Exported Government Instead of Free Enterprise 
and Failed the Russian People
By Speaker's Advisory Group on Russia
U.S. House of Representatives, Washington, D.C. 20515
Report Date: September 2000


Members of the Speaker's Advisory Group on Russia
United States House of Representatives 106th Congress
Hon. Christopher Cox, Chairman/Chairman, House Policy Committee
Hon. Ben Gilman/Chairman, Committee on International Relations
Hon. Porter Goss/Chairman, Permanent Select Committee on Intelligence
Hon. Jim Leach/Chairman, Committee on Banking and Financial Services
Hon. Floyd Spence/Chairman, Committee on Armed Services
Hon. C.W. Young/Chairman, Committee on Appropriations
Hon. Tillie Fowler/Vice Chair, House Republican Conference
Member, Committee on Armed Services
Hon. Jim Saxton/Vice Chairman, Joint Economic Committee
Hon. Spencer Bachus/Chairman, Banking Subcommittee on Domestic and
International Monetary Policy
Hon. Sonny Callahan/Chairman, Appropriations Subcommittee on Foreign
Operations
Hon. Curt Weldon/Chairman, Armed Services Subcommittee on Military Research
and Development
Co-Chairman, Duma-Congress Study Group
Hon. Roger Wicker/Co-Chairman, House Russian Leadership Program
Member, Foreign Operations Appropriations Subcommittee


TABLE OF CONTENTS
Introduction
Executive Summary
CHAPTER 1 1991: The Fall of the Soviet Union and the Rise of Russia
CHAPTER 2 Conditions in Russia at the Outset of the Yeltsin and Clinton 
Administrations
CHAPTER 3 The Task Ahead: Creation of a Free-Enterprise System after a 
Century of State Control
CHAPTER 4 The Fundamental Flaws of the Clinton Administration's Russia Policy
CHAPTER 5 The Gore-Chernomyrdin Commission
CHAPTER 6 'Bull****': Gore and Other Administration Policy Makers 
Systematically Ignore Evidence of Corruption of Their 'Partners'
CHAPTER 7 The Rise of Organized Crime
CHAPTER 8 1998: Years of Bad Advice Culminate in Russia's Total Economic 
Collapse
CHAPTER 9 Weapons Proliferation Feeds a Corrupt and Cash-Starved System
CHAPTER 10 From Friendship to Cold Peace: The Decline of U.S.-Russia 
Relations During the 1990s
CHAPTER 11 'The Enemy of My Enemy Is My Friend': Russia Emerges as a 
Strategic Partner of the People's Republic of China
CHAPTER 12 Despite Years of Policy Failure, A Bright Russian Future Is Still 
Possible
Recommendations
Index



INTRODUCTION


In March 2000, as Russia prepared for the presidential election that would 
formally establish the successor to the Yeltsin administration, the Speaker 
of the House tasked the leadership of six committees of the House of 
Representatives to assess the results of U.S. policy toward Russia during the 
Yeltsin years. This report is the result of that effort.


The Speaker's Advisory Group on Russia comprises the Chairmen of the 
Committees on Armed Services, Appropriations, Banking, Intelligence, and 
International Relations, as well as the House Vice Chairman of the Joint 
Economic Committee, and additional members of the House leadership and the 
committees of jurisdiction. The Advisory Group and its professional staff met 
several times each week over the past five months with key Clinton 
administration policy makers, leaders of Russia's executive and legislative 
branches, and leading academic and private sector experts on Russia and 
U.S.-Russian relations from both countries. The Advisory Group reviewed the 
voluminous committee work and official reports produced by each of the 
relevant committees of Congress, as well as a wide range of primary and 
secondary sources. In addition, the Chairman, and members of the Advisory 
Group, and its professional staff have traveled to Russia on several 
occasions since March 2000.


The persons with whom the Advisory Group and its staff met in the course of 
preparation of this report include Treasury Secretary Lawrence Summers; 
Ambassador Thomas Pickering, Under Secretary of State for Political Affairs; 
U.S. Ambassador to Russia James Collins; Ambassador Stephen R. Sestanovich, 
Special Advisor for the Newly Independent States; Thomas Dine, Director of 
Radio Free Europe/Radio Liberty; Prime Minister Mikhail Kasyanov; Foreign 
Minister Igor Ivanov; former Secretary of the Security Council Andrei 
Kokoshin; First Deputy Minister of Defense Nikolay Mikhailov; State Duma 
Member Igor A. Annensky, Deputy Chairman of the Banking Committee; State Duma 
Member Alexei Arbatov, Deputy Chairman of the Defense Committee; State Duma 
Member Boris Gryzlov, leader of the Unity party in the Duma; State Duma 
Member Konstantin Kosachev, Deputy Chairman of the International Affairs 
Committee; State Duma Member Viktor S. Pleskachevsky, Chairman of the 
Subcommittee on the Funds Market; State Duma Member Vladislav Reznik, Deputy 
Chairman of the Committee on Budget and Taxes; State Duma Member Dimitri O. 
Rogozin, Chairman of the International Affairs Committee; State Duma Member 
Vladimir Ryzhkov; State Duma Member Alexander Shabanov, Deputy Chairman of 
the International Affairs Committee; State Duma Member Alexander N. Shokhin, 
Chairman of the Credit Organizations and Financial Markets Committee; State 
Duma Member Grigory Yavlinsky, leader of the Yabloko party; Andrei Babitsky, 
journalist, Radio Free Europe/Radio Liberty; Scott Blacklin, President, 
American Chamber of Commerce, Moscow; Dr. James Billington, Librarian of 
Congress; Paula Dobriansky, Vice President, Council on Foreign Relations; 
Pavel Felgengauer, military analyst and author; former Russian Finance 
Minister Boris Fyodorov; Dr. Thomas Graham, Senior Associate, the Carnegie 
Endowment for International Peace; Sergei Karaganov, Chairman, Council on 
Foreign and Defense Policy; Igor Malashenko, Media MOST; Arkady Murashev, 
Chairman of the Center for Liberal-Conservative Policy and former Duma 
Member; Ruslan Pukhov, Director, Center for Analysis of Strategy and 
Technology; Peter W. Rodman, Director of National Security Programs at The 
Nixon Center; Ivan Safranchuk, Project Director, Center for Policy Studies in 
Russia; Dimitri Simes, President of The Nixon Center; and Dimitri Trenin, 
Deputy Director, Carnegie Endowment for International Peace (Moscow Center).


This report begins with a summary of the historic events that led to the 
collapse of the Soviet Union in December 1991 and a description of the 
conditions in Russia during the last year of the Bush administration and at 
the commencement of the Clinton administration. It assesses the task ahead 
for Russia in moving from a century of state control to a free enterprise 
democracy, and compares that agenda with the actual policies pursued by the 
Clinton administration from 1993 to the present. The manifold failures of 
both Russian and U.S. government policy are surveyed: the early corruption of 
the non-market "privatization" to insiders; the spread of organized crime; 
the eventual complete collapse of the Russian economy in 1998; the rise of 
weapons proliferation as a means of generating hard currency; and the 
increasing estrangement of Russia from the United States, essentially 
reversing the trends that existed in 1992.


Finally, the report addresses itself to the opportunities for U.S.-Russian 
relations that still remain, despite years of failure. Recommendations of the 
Advisory Group for future policy appear at the conclusion of the report.


September 2000


EXECUTIVE SUMMARY


The Fall of the Soviet Union and the Rise of Russia


The collapse of the Soviet Union brought to an end one of the cruelest, most 
violent, least humane, and most viciously ideological regimes in the history 
of the world. The Soviet Union--more aptly, the Soviet Empire--collapsed of 
its own weight, crushed by the material and spiritual burdens of its 
collectivist ideology.


In the final days of the Soviet Union, President Gorbachev desperately sought 
billions in foreign loans, and many in the West endorsed a policy of 
providing enormous amounts of aid in an attempt to save the collapsing Soviet 
economy. President Bush believed this would not work. "A shortage of foreign 
capital is not what plunged your economy into crisis, nor can your economic 
ills be cured by an infusion of cash," he told the Moscow State Institute for 
International Relations in a speech on July 31, 1991, five months before the 
Soviet Union ended.


When the Soviet Union's Vice President, Prime Minister, Defense Minister, KGB 
Chairman, and other hard-line Communists launched a coup against Gorbachev on 
August 19, 1991, the Russian President, Boris Yeltsin, denounced it as 
unconstitutional. The following day, on the only functioning phone line, 
Yeltsin spoke to President Bush, who firmly pledged that the United States 
would not recognize the coup government. Bush's action in support of Yeltsin 
and the Russian people proved decisive.


The rapid failure of the coup demonstrated the weakness of hard-line Soviet 
Communist Party elements. Within a month after the coup, 11 of the Soviet 
Union's 15 republics had declared their independence.


Following the coup, U.S. Secretary of State James A. Baker III and Gen. 
Vladimir Lobov, Chief of the Soviet General Staff, signed an agreement to 
dramatically reduce the number of short-range nuclear weapons in the U.S. and 
Soviet arsenals. By the end of the year, the United States had committed $400 
million to help dismantle Soviet nuclear weapons.


When Mikhail Gorbachev resigned as the last leader of the Soviet Union on 
December 25, 1991, America's relations with the largest of the captive 
nations newly freed from the Soviet Empire were auspicious.


Conditions in Russia at the Outset of the Yeltsin and Clinton Administrations


The West's victory in the Cold War presented America with its greatest 
foreign policy opportunity since the end of World War II. Just as America's 
defeated enemies, Nazi Germany and Imperial Japan, had become free enterprise 
democracies and close U.S. allies, so too might the new Russian Federation.


The U.S.-Russian relationship that President Clinton inherited could only 
have been dreamed of by his predecessors from Truman to Reagan. American 
values, including free enterprise and democracy, enjoyed an astonishing level 
of prestige and popularity among the Russian people. Building a relationship 
with the United States was the highest priority for the Russian government. 
Prior to 1993, Moscow worked harmoniously with Washington across virtually 
the entire spectrum of international issues--including Operation Desert 
Storm, waged against the Soviet Union's client state Iraq; arms control, 
culminating in a START II treaty that slashed U.S. and Russian nuclear 
arsenals by 66%; and ballistic missile defense, on which President Bush and 
President Yeltsin launched negotiations that were aimed at the changes in the 
ABM Treaty of 1972 necessary to take account of the spread of ballistic 
missiles and weapons of mass destruction.
The Task Ahead: Creation of a Free Enterprise System After a Century of State 
Control


The collapse of Communism in Russia ended not only the Soviet police state 
but the Soviet-era centrally-planned economy. In January 1992, there was for 
the first time in the experience of most living Russians a genuine 
opportunity to build the foundation of a free enterprise system.


The necessary bricks for that foundation were clear enough. The question was 
not whether, but where--and how--to begin. To move from the Soviet Union's 
state-controlled economy to a free enterprise system based on private 
property, markets, and individual choice called for change on a 
breathtakingly large scale.


* Soviet-era laws and regulations governing commerce would have to be 
repealed.


* New legal protections for private property and private contracts would have 
to be enacted, and the courts would have to build public confidence that 
private contracts would be enforceable.


* Private banks that paid for deposits at market rates, evaluated credit 
risks according to market criteria, and served as genuine intermediaries 
between sources of capital and start-up private enterprises would have to be 
legalized.


* The Soviet-era network of 200,000 inefficient state-owned enterprises would 
have to be forced into competition.


* Over 1.5 trillion acres of arable land owned by the Soviet government would 
have to be transferred to private ownership to provide a source of wealth to 
the Russian people, collateral for commercial and agricultural lending, and 
the basis for home ownership and mortgage finance.


* The existing stock of Soviet-era state-owned housing would have to be 
converted to private ownership, and the private construction of more and 
better housing legalized.


* A workable bankruptcy procedure creating the "freedom to fail" would have 
to be established, in order to end wasteful subsidies and subject commercial 
enterprises to market discipline.


* A lower tax rate and simpler tax code would have to be enacted to 
demonstrate that the new Russian government was not bent on redistributing 
income but rather sought to promote a market economy.


* A commercial code--a basic set of rules that could be relied upon by any 
Russian citizen or foreigner who wished to buy or sell something--would have 
to be enacted.


* Soviet-era barriers to foreign investment in Russia would have to be 
eliminated.


The opportunities that awaited Russia in 1992 were exhilarating, but 
dismantling the Soviet system of government controls, and erecting in its 
place a free market economy based on private decision making and risk taking, 
was a task of monumental proportions. It required significant new legislation 
from Russia's parliament. Yet the ultimate objective was abundantly clear: 
the new Russian government's job was to get itself out of the economy and 
facilitate private actors through clear commercial rules for enforcement of 
private property rights and private contracts.


The Fundamental Flaws of the Clinton Administration's Russia Policy


During his 1992 campaign and the first several years of his administration, 
President Clinton made clear his unwillingness to involve himself in foreign 
policy generally, and the critical issue of U.S. policy toward Russia 
specifically. The virtual absence of any non-ceremonial presidential 
involvement in the greatest foreign policy opportunity for the United States 
since World War II was to prove crippling to the development and execution of 
United States policy toward Russia.


Lacking presidential attention, decision making on Russia policy eventually 
devolved to a troika of subordinate officials: Vice President Gore (assisted 
by his foreign policy mentor Leon Fuerth), Strobe Talbott at the State 
Department, and Lawrence Summers at the Treasury Department. Creation of the 
Gore-Talbott-Summers troika vested authority for the development and 
execution of Russia policy in an elite and uniquely insular policy-making 
group without accountability to the normal checks and balances within the 
executive branch.


The structure of the policy-making troika left the rest of the government 
either unwilling or unable to critically assess the direction of the Clinton 
administration policy. The policy decisions that emerged were marked with the 
personal biases and predispositions of these three individuals. Their small 
circle soon became an echo chamber, reinforcing their own views and excluding 
independent information, analyses, and recommendations from the national 
security, foreign policy, and intelligence professionals throughout the U.S. 
government.


The troika also excluded Congress from the development of the Clinton 
administration's Russia policy, thereby further isolating it from outside 
review, and failing to develop the broader institutional and popular support 
that it would need to succeed in America and abroad. As a result, the Clinton 
administration's policy has repeatedly been repudiated by bipartisan 
majorities in Congress.


The unorthodox "troika" institutional arrangement produced the following 
fundamental flaws in U.S. policy toward Russia from 1993 forward:


* A strong preference for strengthening Russia's central government, rather 
than deconstructing the Soviet state and building from scratch a system of 
free enterprise


* A close personal association with a few Russian officials, even after they 
became corrupt, instead of a consistent and principled approach to policy 
that transcended personalities


* A narrow focus on the Russian executive branch to the near exclusion of the 
Russian legislature, regional governments, and private organizations


* An arrogance toward Russia's nascent democratic constituencies that led to 
attempts at democratic ends through decidedly non-democratic means


* An unwillingness to let facts guide policy, or even to make mid-course 
corrections in light of increasing corruption and mounting evidence of the 
failure of their policies


By focusing on strengthening the finances of the Russian government and on 
transforming state-owned monopolies into private monopolies, instead of 
building the fundamentals of a free enterprise system, the Clinton 
administration ensured that billions in Western economic assistance to Russia 
would amount to mere temporizing. The Gore-Talbott-Summers focus--on 
macromanagement of the Russian economy instead of the legal fundamentals that 
would permit individuals to start businesses, grow a competitive market 
economy, and create a tax base--doomed their "privatization" efforts to 
failure.


Worse, by using massive lending and aid to plug the gap in the Russian 
central government's operating budget, the Clinton administration exposed 
these funds to theft and fraud.


For its part, the Russian government lacked the facility to turn these 
massive aid flows into real economic reform. Instead, the aid had the 
opposite effect: it made possible the subsidies to the Soviet enterprise 
network that allowed it to continue operating. Effectively unconditional 
large-scale international assistance simply contributed to Russia's problems 
by killing incentives to reform and propping up a government whose policies 
were bankrupting the Russian people.


The flood of loans also added to Russia's growing foreign debt, which 
continues to burden the central government's operating budget and weigh down 
the nation's economic prospects.


The Clinton administration was unwilling to recognize the costs to Russian 
democracy--and to Russian perceptions of America--of its unquestioning 
support for its Russian partners despite their corrupt conduct. The Clinton 
administration's enormous political stake in its Russian partners gave it an 
overwhelming incentive to ignore and suppress evidence of wrongdoing and 
failure by officials including Viktor Chernomyrdin and Anatoly Chubais, who 
had come to personify the administration's Russia policy. The Clinton 
administration's closeness to a few Russian individuals impaired its ability 
to confront genuine differences between U.S. and Russian interests--as, for 
example, in the case of Chechnya, where President Clinton compared Yeltsin to 
Abraham Lincoln.


The Clinton administration's exceptionally close personal relationship with 
its few official Russian partners was a sharp contrast with its merely pro 
forma engagement with Russia's legislature, its opposition parties, and its 
regional governments.


The Clinton administration encouraged disregard for the legislative branch by 
the Yeltsin administration, and thus played a part in undermining the growth 
of pluralistic, democratic government in Russia. This has aptly been called a 
"bolshevik" approach to accomplishing "reform"--authoritarian measures in 
both the political and economic spheres, typified by Yeltsin's propensity to 
rule by decree. It virtually guaranteed that the legal reforms needed to 
establish a genuine free enterprise system would not be enacted in the Duma 
or in the regional legislatures.


The Gore-Chernomyrdin Commission


In April 1993, during his first meeting with President Yeltsin, President 
Clinton effectively delegated the management of U.S.-Russian relations to 
Vice President Gore. The charter of the U.S.-Russia Commission on Economic 
and Technical Cooperation, co-chaired by Gore and Russian Prime Minister 
Viktor Chernomyrdin, was eventually expanded to include the full range of 
U.S.-Russia relations.


Clinton's abdication to Gore of authority over the most important foreign 
policy opportunity for America since World War II--the rebuilding of Russia 
after the collapse of the Soviet Union--had fateful consequences. By 
assigning this portfolio of overarching importance to his 
second-in-command--whose priorities were "reinventing government," 
environmental issues, and technology policy--Clinton guaranteed that Russia 
policy would receive only desultory attention.


The Gore-Chernomyrdin Commission's function and structure offered a perfect 
blueprint for the eventual failure of the entire Clinton administration 
policy toward Russia. By superseding normal policy making and well 
established intra- and inter-governmental channels of communication, the 
Gore-Chernomyrdin Commission would come to impede the information flow to 
decision makers in Washington. The Gore-Chernomyrdin Commission likewise 
distracted Russian government officials from what should have been their main 
focus: constructing the essential elements of a free enterprise economy.


The meager accomplishments of the Commission could hardly mask its 
fundamental failures. Russia even today lacks the most basic elements of a 
free market economy; the costs and delays from U.S.-Russian space cooperation 
(the initial project of the Commission) continued to escalate; the 
"privatization" of Russia's energy sector (another Commission priority) was 
becoming criminally corrupt; and Russia was accelerating its proliferation of 
dangerous technology. The Commission worked to divert attention from this 
string of major policy failures, and issued frequent proclamations of minor 
successes.


The Gore-Chernomyrdin Commission contributed to a deliberately uninformed 
U.S. policy toward Russia. It refused to acknowledge failure, and, even 
worse, celebrated failure as if it were success. The Clinton administration's 
dependence on the Gore-Chernomyrdin Commission, coupled with the Commission's 
refusal to listen to independent information, meant that administration 
Russia policy was both procedurally and substantively unsound.
'Bull****': Gore and Other Administration Policy Makers Systematically Ignore 
Evidence of Corruption of Their 'Partners'


In 1995, CIA officials dispatched to the White House a secret report based 
upon the agency's large dossier documenting the corrupt practices of 
then-Russian Prime Minister Viktor Chernomyrdin. Chernomyrdin's private 
assets accumulated in his official position, according to Russian security 
sources, ran into the billions of dollars. When the secret report on 
Chernomyrdin reached Vice President Gore, he refused to accept it. Instead, 
according to several CIA sources, he sent it back to the agency with the word 
"BULL****" scrawled across it.


It is difficult to imagine a more dangerously intemperate reaction to 
official corruption in Russia. Yet this was hardly an isolated incident. The 
administration had ignored repeated earlier warnings of corruption by 
Chernomyrdin and other senior Russian officials. Several Clinton 
administration senior officials have stated publicly that, by 1995, they had 
received a number of reports from the CIA alleging corruption by 
Chernomyrdin, and that the CIA had submitted many other reports alleging 
corruption among other senior Russian leaders, including Clinton 
administration favorite Anatoly Chubais.


Gore's close personal relationship to Viktor Chernomyrdin--and not any 
superior intelligence that he possessed as Vice President--was obviously 
decisive in his emotional dismissal of the CIA intelligence report of 
Chernomyrdin's corruption. (While Gore has publicly denied the "bull****" 
incident, he has also re-stated his harsh criticism of CIA reporting on 
Chernomyrdin's corruption.) This reflexive dismissal of corruption 
allegations against Viktor Chernomyrdin was all the more remarkable given 
contemporaneous Russian and U.S. media reports about Chernomyrdin's alleged 
corruption and continuing links to the Russian gas conglomerate Gazprom after 
his entry into government.


At precisely the same time that Gore was receiving reports of Chernomyrdin's 
corruption, the vice president was effusive in his public comments about 
Chernomyrdin, stating in June 1995 in Moscow: "Friends have a right to be 
proud of friends."


In this way, the Clinton administration--and Gore personally--contributed not 
only to the spread of corruption, but to Russia's failure to overcome it. 
Since Chernomyrdin served as prime minister for five years, it is clear that 
this embrace of corruption fundamentally compromised Russia's efforts at 
economic reform.


Vice President Gore has hedged his denial of the "bull****" incident, saying 
"I don't think" that I "ever wrote a message of that kind." Moreover, while 
denying writing the word "bull****," Gore plainly referred to a specific CIA 
report, saying "whoever sent that over there [could not have] expected the 
White House to be impressed with it ... it was a very sloppy piece of work."


Other administration officials, defending Gore's position, dismissed the CIA 
reports of Chernomyrdin's corruption as lacking "conclusive proof." But 
agency reporting is necessarily based on intelligence sources, often covert. 
By conveniently demanding a "smoking gun" whenever they sought to suppress 
uncomfortable facts, Gore and other top Clinton administration officials 
established a rigged system that rejected "inconvenient" intelligence 
whenever it suited the preferences of the White House.


CIA officials have described the intelligence information concerning 
Chernomyrdin that was provided to Gore as "more detailed and conclusive than 
allegations of bribery and insider dealing that have been made in the Russian 
media and elsewhere." Yet when asked--as recently as July 2000--whether 
Chernomyrdin is corrupt, Gore replied: "I have no idea."


The Rise of Organized Crime


The Clinton administration's failed economic strategy for Russia and its 
tight embrace of corrupt officials including Viktor Chernomyrdin had serious 
negative consequences for Russia's battle against organized crime.


The Clinton administration's failure to focus its full attention on replacing 
Communism with the basic legal elements of the free enterprise system helped 
create the conditions in which organized crime has flourished. Without such 
essentials as legislated protections for private property, a modern 
commercial code, and honest, efficient, and speedy courts to enforce property 
rights, the "privatization" of government entities in Russia predictably 
resulted in chaos.


Organized crime came to be responsible not only for grisly mayhem and 
violence, but also for functions as diverse as enforcing contracts and court 
judgments, providing personal security, and even allocating scarce resources 
(through bribes to corrupt officials). The ability of some Russian organized 
crime groups to draw upon the specialized expertise and contacts of former 
Soviet security personnel further increased their ability to compete with 
such legitimate law enforcement as existed, both in technological 
sophistication (in areas such as cyber-crime) and geographic reach.


The oligarchic economy, created with the advice and assistance of the Clinton 
administration, also tightened the stranglehold of official corruption over 
the Russian government and the large sector of the ostensibly "privatized" 
economy that it influenced. This official corruption both obstructed law 
enforcement and created a symbiotic relationship between corrupt government 
officials and organized crime, assisting them in laundering money and in the 
commission of other crimes.


The Clinton administration's decision to base U.S.-Russian relations on Vice 
President Gore's relationship with Viktor Chernomyrdin and a handful of other 
high officials sent a strong public signal that the United States would not 
only tolerate but embrace figures clearly identified in the Russian media and 
public consciousness with corruption--further undercutting law enforcement, 
and demoralizing not only the out-manned and underpaid Russian foes of 
organized crime, but also the Russian people.


Russia's rampant capital flight, estimated at as much as $500 billion since 
Russian independence, is another serious consequence of corruption and 
organized crime. Even the most conservative estimates of capital flight 
demonstrate that the amount of money leaving Russia has far outstripped the 
money coming in from all sources--including foreign direct investment in 
Russia, Russia's soaring foreign debt, and direct Western aid to Russia.


The Clinton administration, prone to "spinning" bad news and ignoring its 
implications, has addressed both organized crime and capital flight 
superficially. The administration's efforts against organized crime have 
focused on modest technical assistance to Russian law enforcement and the 
creation of an FBI presence in Russia, in every case channeling that 
assistance through their Russian "partners" who were central to the 
corruption of the Russian government. By its own admission, the 
administration gave insufficient priority to Russian money laundering--as 
revealed by the Bank of New York scandal, involving the laundering of as much 
as $10 billion.


The Clinton troika inferred from these phenomena no lessons about the 
consequences of its failure to promote the basic elements of a free 
enterprise economy to replace Communism.


1998: Years of Bad Advice Culminate in Russia's Total Economic Collapse


The culmination of the Clinton administration's fatally-flawed macroeconomic 
policy for Russia occurred in August 1998, when Russia's default on its debts 
and devaluation of the ruble led to the nation's total economic collapse. By 
all measurements, the disaster was worse than America's Crash of 1929.


The disaster that began on August 17, 1998, spread immediately throughout 
Russia. Millions of ordinary men and women who had deposited their money in 
Russian banks lost everything. ATM and debit cards ceased to work. Dozens of 
banks became insolvent and disappeared. Angry depositors besieged Russian 
banks, only to learn they had been wiped out.


Millions of senior citizens, whose meager pension income had been suspended 
for months, were cut off completely. When the dust finally settled in March 
1999, the ruble--and with it, every Russian's life savings--had lost fully 
75% of its value.


The devastation of Russia's economy was worse than what America experienced 
in the Great Depression. By 1932, the U.S. gross national product had been 
cut by almost one-third. But within just six months of the 1998 crash, 
Russia's economy, measured in dollars, had fallen by more than two-thirds. 
>From $422 billion in 1997, Russia's gross domestic product fell to only $132 
billion by the end of 1998.


At the end of 1929, following America's disastrous stock market crash, 
unemployment in the United States reached 1.5 million, representing 1.2% of 
the total population. The 1998 collapse of the Russian economy was far worse: 
11.3 million Russians were jobless at the end of 1998--7.7% of the nation's 
total population.


In the Crash of 1929, stock prices fell 17% by year end--and 90% by the depth 
of the Great Depression four years later. By contrast, the Russian stock 
market lost 90% of its value in 1998 alone.


"Most fundamentally," said Sergei Markov, an analyst at the Institute of 
Political Studies, "it is a crisis of the real economy--Russia doesn't work."


Foreign investment in Russia plummeted from $4 billion in 1997 to $1.7 
billion in 1998. The collapse of international trade not only curtailed the 
supply of foreign goods, but also created scarcities and high prices for 
Russian-made goods with foreign components. Drugs and medicines, always in 
short supply, became even more difficult to come by. Shortages of meat and 
cooking oil were so severe that humanitarian food aid from the West, which 
had not been necessary since the collapse of Communism, was resumed on 
emergency basis.


The lack of a reliable currency reduced much of Russia to a barter economy.


The 1998 economic collapse also accelerated Russia's deepening social 
pathologies. Russia's population, which has fallen every year since 1992, 
shrunk at an accelerated pace as deaths outnumbered births by 784,000 in 
1999, the year following the crash. The economic hardship of raising a child 
further inflated Russia's sky-high abortion rates: for every birth in Russia, 
there are now two abortions. Drug use and addiction in Russia have 
skyrocketed, fueled by the growth in organized crime and widespread economic 
depression.


Alcoholism, a chronic problem in Russia, has grown worse as economic 
conditions have worsened: according to a January 2000 report, the number of 
deaths resulting from alcohol poisoning is over 100 times that in the United 
States.


The jump in drug use has also led to an increase in HIV infections. Drug 
addicts account for 90% of all HIV-infected people in Russia. The collapse of 
the Russian economy in 1998 coincided with a massive increase in the number 
of people living with HIV. Russia's HIV population literally doubled between 
1997 and 1999--the fastest growth rate in the world.


The road to this crisis had been littered with warning signs that the Clinton 
administration ignored for years. The U.S. encouragement of increasingly 
massive loans to the Russian central government from the IMF continued 
despite the lack of basic free market legislation in place to justify it. 
With no market in banking services, no reliable protection for private 
property rights, no mortgage lending, and no commercial dispute resolution, 
capital flight--fueled by IMF hard currency--approached 10% of Russia's gross 
domestic product.


Russia's heavy reliance on borrowing to finance its annual operations caused 
investors to demand exorbitant premiums to hold Russian debt. The government 
offered ever-higher interest rates--at times approaching 250%. The process 
was unsustainable. In a full-blown Ponzi scheme, new higher-interest Russian 
bonds were issued to pay interest on old bonds. By mid-1998 some 30% of 
Russia's budgetary outlays were devoted to debt service.


As they had for five years, the Clinton administration and its tight policy 
clique miscalculated the effects of their policies and closed their eyes to 
the consequences. On July 28, 1998, Treasury Secretary Robert Rubin wrote to 
then-House Speaker Newt Gingrich that the Russian government could now be 
expected to "finally take the myriad steps needed to put its finances on a 
sustainable path." The same day, Stanley Fischer, the IMF's Deputy Managing 
Director, insisted: "The pressure is off the ruble."


In early August 1998, President Clinton was concerned about his scheduled 
September 1998 summit with Yeltsin. The White House dispatched a Treasury 
Department official to Moscow "to ensure that the show stays on the road for 
the next three weeks at least."


On Monday, August 17, the Russian government formally declared its 
insolvency, and the horrific economic consequences rapidly followed. The 
Clinton troika strategy of massive lending to the central government as a 
substitute for the construction of a free enterprise system in Russia had 
proved an error of historic proportions.


The administration had, in effect, hijacked the IMF to implement its economic 
strategy, and the IMF debt, far from solving Russia's problems, had 
exacerbated its difficulties. But despite having engineered the entire series 
of loans that contributed to Russia's complete economic collapse, the Clinton 
administration immediately attempted to distance itself from the fiasco. "It 
was the Russians' choice," said one Clinton administration official.


Few in Russia accepted this version of events. Many Russians, not 
surprisingly, blamed the West, the IMF, and the United States for 
intentionally leading Russia down the path of ruin. The heavy-handed and 
wrong-headed involvement of Clinton administration officials in Russian 
government economic policy made America an easy scapegoat for disgruntled 
Russians. Since the beginning of the Clinton administration, U.S. officials 
had urged a steady diet of borrowing to mask the Russian economy's 
fundamental weaknesses--prolonging and deepening the eventual collapse.


Russia's economic collapse in August 1998, after six years of American advice 
and scores of billions in Western aid, shattered the last illusions in both 
Russia and the West that a free market and prosperity were making slow but 
steady progress in Russia. It marked the final bankruptcy of the Clinton 
administration's economic strategy of macroeconomic "stabilization" and 
massive aid inflows, and contributed to the discrediting of American advice 
and institutions within Russia.


The effects of the complete collapse of the Russian economy in August 1998 
were profound. They are still being felt today.


Weapons Proliferation Feeds a Corrupt and Cash-Starved System


The failure of the Clinton administration's economic strategy for Russia has 
had profound implications for Russia's policy on proliferation of weapons and 
technology, and therefore for America's national security interests.


Between 1992 and 1999, the Russian economy contracted 25%. Currently, 13.3% 
of the labor force is officially unemployed, compared with only 4.8% in 1992. 
The complete collapse of Russia's economy in 1998 saw industrial and 
agricultural output drop sharply. Investment in Russia suffered as capital 
flight crippled the private sector. These increasingly severe financial 
pressures, coupled with a paucity of alternate sources of much-needed hard 
currency, tempted the Russian government to both legal and illegal weapons 
sales as a way out.


Russia's failure to create a working free enterprise system likewise stalled 
conversion of the military sector of the economy. In Soviet days, the one 
industry in which Russia enjoyed a true comparative advantage in global 
markets was its military hardware, weaponry, and related technologies. When 
the Soviet Union collapsed in 1991, Russia inherited a massive infrastructure 
devoted to the development and production of weapons. Despite the 1992 
beginnings of downsizing in the former Soviet military-industrial complex, 
much of that infrastructure remains in Russia.


The decline in Russian military spending and the general failure of Russia's 
economy during the Clinton-Yeltsin years meant that this immense 
military-industrial complex faced urgent incentives to sell as much as 
possible as quickly as possible, often irrespective of the long-term 
implications for Russia's own security.


At some former research facilities, fully half of the scientific personnel 
had been laid off by the fall of 1995, but the Russian economy could not 
absorb them. As a result, individual officers, bureaucrats, and scientists, 
whole research facilities, design bureaus, ministries and even the central 
government had economic incentives to sell extraordinarily-sensitive weapons 
and technology to any nation or groups that would buy them.


To many in the Russian government, exporting such hugely valuable contraband 
seemed to solve several problems. It would generate hard currency; it would 
utilize existing Russian assets; and it would put possibly hundreds of 
thousands of unemployed Russians back to work. For the many Russians 
increasingly involved in organized crime, there was yet another benefit: the 
opportunity for significant personal wealth.


Official Russian policy was eventually brought into line with these 
expedients. Under the rubric of "strengthening multipolarity," the avowed 
purpose of the new Russian consensus on foreign policy and national security 
is to increase the strength of global forces arrayed against the United 
States. This consensus helps allay any concerns that Russian officials, 
scientists, and businessmen might have about transferring weapons or military 
technology to such countries as Iran, Iraq, North Korea, Libya, and the PRC.


President Putin recently amended Yeltsin's 1992 decree limiting Russian 
nuclear assistance to countries whose nuclear programs are not fully 
monitored by the International Atomic Energy Agency, including Iran and North 
Korea. When Russia's national interest is understood to be strengthened by 
weakening the United States, the Russian military-industrial complex can do 
well by doing good.


The Clinton administration's culpability for this proliferation extends 
considerably beyond helping to create the economic prerequisites for it. The 
administration has consistently de-emphasized proliferation in its 
discussions with Russia--ignoring credible American and Israeli evidence of 
proliferation, accepting Russian assurances that were patently not credible, 
and strongly opposing bipartisan Congressional efforts to take a stronger 
stand against proliferation.


This has been particularly true of Vice President Gore's stewardship of the 
issue of Russian proliferation to Iran. In fact, Congress' efforts to combat 
Russian proliferation to Iran have drawn far more vocal opposition from the 
administration than the dangerous spread of weapons that Congress seeks to 
address. The administration has been compromised from the outset by an 
unwillingness to admit that its anointed Russian "partners" might have been 
dishonest in their assurances, or unwilling to live up to their commitments, 
that weapons proliferation would stop.


>From Friendship to Cold Peace: The Decline of U.S.-Russia Relations During 
the 1990s


Eight years ago, when President Clinton took office, the stated objective of 
the Russian government was a formal alliance with the United States. Russia 
pursued a strongly pro-American foreign policy, and the United States enjoyed 
unprecedented affection and admiration among ordinary Russians. Today, the 
United States' relationship with Russia has been shattered.


Where 70% of Russians held a favorable view of the United States when 
President Clinton took office, 37% hold such views today. More than 80% of 
Russians polled by the U.S. government in February 2000 thought that the 
United States was seeking to weaken Russia, while 85% believed that the 
United States sought world domination.


The quality of the economic advice that the Clinton administration has 
offered to Russia has been so bad, and its results so dismal, that 81% of 
Russians believe it was purposely designed to make Russia a second-rate 
power. President Clinton himself has become one of the most unpopular 
international figures in Russia, second only to Saddam Hussein in some 
polling.


These negative views of America have grown steadily worse throughout the 
course of the Clinton administration, and are shared by all levels of Russian 
society and by all age groups. As a result, ordinary Russians today are now 
working up hostility toward the United States, a phenomenon decades of Soviet 
propaganda had been unable to achieve during the Cold War.


The collapse of American prestige in Russia has been largely caused by the 
failure of what Russians perceive as the "American model" of economic and 
political reform--that is, the policy advice proffered by the Clinton 
administration. Russians find evidence of this failure all around them. 
Russia today is more corrupt, more lawless, less democratic, poorer, and more 
unstable than it was when President Clinton and Vice President Gore took 
office--a society some Russian and American observers chillingly describe as 
"Weimar Russia."


The political and policy vacuum created by this failure has empowered some of 
the most retrograde, anti-American elements of the Russian foreign policy and 
military establishments. Many of their views have lately entered the 
mainstream of official Russian thinking. As a result, the Russian government 
today works against American foreign and defense policy around the world, 
often at the expense of Russia's own long-term interests. In concert with a 
rogue's gallery of rivals and enemies of the United States, Russia is today 
maintaining its intelligence relationship with Castro and its listening post 
at Lourdes, Cuba; working with Beijing to renew both political and military 
ties with the pariah regimes in Iraq, North Korea, and Libya; and cultivating 
the Milosevic dictatorship in Belgrade.


Eight years after Russia announced its pursuit of a formal alliance with the 
United States, Russian foreign policy has retrogressed toward that of the 
pre-perestroika Cold War period. Whereas Presidents Yeltsin and Bush had 
agreed to pursue amending the ABM Treaty to take into account the 
proliferation of ballistic missiles, the Russian government has recently 
stated that U.S. failure to observe the treaty as the linchpin of our mutual 
security will cause Russia to renew the nuclear threat to Europe. Moscow has 
also threatened to deploy multiple warheads on its Topol intercontinental 
ballistic missiles (in violation of the Bush-Yeltsin START II agreement) as 
part of its "asymmetrical" response to the U.S. position that the ABM Treaty 
is outdated.


Russia is simultaneously continuing the very proliferant activities that have 
made a U.S. missile defense essential. As recently as June 2000, just weeks 
before President Putin's visit to North Korea, missile component companies in 
Russia and Uzbekistan were reportedly collaborating to sell North Korea a 
special aluminum alloy for missile manufacture, laser gyroscopes used in 
missile guidance, and connectors and relays used in missile electronics.


The Russian government has intensified its opposition to NATO enlargement, 
and zealously seeks to weaken ties between the United States and NATO Europe. 
Recent Russian policy has revived Soviet-era proposals to substitute a 
pan-European collective security structure for the current alliance-based 
security system.


A more troubling contrast to the atmosphere of the early 1990s could hardly 
be imagined. Yet, confronted with the consequences of its policies, the 
Clinton administration has applauded itself for having avoided an even worse 
scenario such as a Soviet Communist restoration, a military dictatorship, or 
nuclear war. That is a remarkably inadequate vision of what could have been 
made of the most significant opportunity in this century for Russia, and the 
greatest foreign policy opportunity for the United States since World War II.


'The Enemy of My Enemy Is My Friend': Russia Emerges as a Strategic Partner 
of the People's Republic of China


Although the Clinton administration has long boasted of its "strategic 
partnership" with Russia, the Russian government unmistakably disavowed any 
such relationship in its authoritative Foreign Policy Concept, approved by 
President Putin in June 2000. The Foreign Policy Concept flatly states that 
"certain plans relating to establishing new, equitable, and mutually 
advantageous partnership relations of Russia with the rest of the 
world"--plans embodied in the 1993 version of the Concept approved as 
President Clinton was taking office--"have not been justified."


Instead, the June 2000 Concept lists first among the threats to Russia "a 
growing trend towards the establishment of a unipolar structure of the world 
with the economic and power domination of the United States." To challenge 
America's dominance, Russia today cultivates its strategic partnership with 
the People's Republic of China--a partnership explicitly targeting American 
policies and interests around the globe, and founded on increasing both the 
PRC's and Russia's military capabilities against the United States. This is 
in stark contrast to Russia's explicitly seeking an alliance and missile 
defense cooperation with Washington in 1992.


Russia and the PRC have rapidly increased the level of their cooperation in 
opposing American plans for national and theater missile defense, NATO 
enlargement, U.S. security cooperation with Taiwan, and U.S. opposition to 
the North Korean missile program.


Even more troubling is the dramatically increasing scale and sophistication 
of Russian arms and technology transfers to the PRC: Sovremenny-class 
destroyers equipped with Moskit surface-to-surface missiles, state-of-the-art 
weapons systems specifically designed to destroy U.S. aircraft carriers; 
ultra-quiet Kilo-class diesel submarines; Su-30 long-range attack aircraft 
and MiG-31 long-range fighter-interceptors; AWACS radar systems; T-80U tanks; 
state-of-the-art Russian surface-to-air missiles; and rocket engines, as well 
as many other weapons systems and technologies. Negotiations are reportedly 
underway for still more sophisticated weapons systems and technology. There 
are also reports of far-reaching Russian military commitments to the PRC in 
the event of hostilities over Taiwan.


After tens of billions of dollars in Western assistance and eight years of 
mismanagement by the Clinton administration, the U.S.-Russian relationship is 
in tatters, characterized by deep and growing hostility and divergent 
perceptions of international realities and intentions. The Sino-Russian 
relationship, by contrast, has grown steadily stronger, and has steadily 
assumed a more overtly anti-American aspect.


Because of Russia's current and future importance, the consequences of this 
failure are difficult to overstate, and almost certainly exceed the 
consequences of the American defeat in Vietnam and the fall of the 
pro-American government in Iran. To find a foreign policy failure of 
comparable scope and significance, it would be necessary to imagine that 
after eight years of American effort and billions of dollars of Marshall Plan 
aid, public opinion in Western Europe had become solidly anti-American, and 
Western European governments were vigorously collaborating in a "strategic 
partnership" directed against the United States.


Despite Years of Policy Failure, a Bright Russian Future Is Still Possible


The task ahead for Russia in 2000 is essentially the same as it was in 1992. 
Since so little progress has been made toward putting in place the building 
blocks of a free enterprise economy, that work must now begin in earnest. But 
whereas conditions in Russia in 1992 were eminently hospitable to such an 
undertaking, the ensuing years of policy failure have squandered that 
advantage. Now, with so many Russians having soured on "reform," the 
necessary work will be much more difficult.


Despite the dimensions of the task ahead, the outlook for Russia is not 
entirely bleak. The economic collapse of 1998, while devastating, has given 
way to a determined effort to dig out from beneath the rubble and start 
afresh. The hostility engendered by the statist, incoherent, and 
clumsily-administered Clinton administration foreign policy need not create 
an enduring cold peace.


The slow economic progress that began in 1999 has gained some momentum in 
2000. The Russian government reported in July 2000 that the economy was 
growing at an annual rate of 7.3% during the first six months, while output 
from January to June rose 8.6%. Fueled by strong energy exports, Russia's 
trade surplus reached $27 billion for the first five months of this year.


Importantly, the Russian government is using the breathing room created by 
high oil prices to implement much-needed tax simplification and government 
spending reductions. After President Boris Yeltsin's December 1999 
resignation, Russia's Center for Strategic Research was tasked with drafting 
an economic reform program for the incoming Putin government. The Center 
released its report in June 2000, which emphasized:


* Reducing government spending


* Balancing the central government's budget


* Eliminating many state subsidies


* Implementing a 13% flat income tax


President Putin signed the flat tax into law on August 7, 2000, calling it 
"the most important event in the country's life."


Amidst these signs of slow economic recovery, foreign investment is 
tentatively trending toward pre-August 1998 levels. More than $10 billion in 
foreign capital has entered Russia during the first five months of 
2000--twice as much as during all of 1999.


Russia has other inherent assets that were not wiped out by the economic 
collapse of 1998, nor erased by decades of Soviet Communism. For example, a 
silver lining to the Soviet state's lack of academic freedom was its focus on 
training scientists and specialists. The high level of education and skills 
in these areas among much of the Russian workforce is an asset that Russia 
still possesses intact.


Perhaps most important for Russia's future is that young Russians are 
significantly more supportive of democracy and free enterprise than their 
older countrymen. The younger generation in Russia--less influenced by the 
legacy of Soviet Communism than its parents--displays an entrepreneurial 
spirit unknown in Soviet days. Remarkably, three-quarters of 18-29 year olds 
believe that it is important "to achieve success with a business of their 
own." This energy and vigor can transform Russian society and Russia's 
economic future, if it is not indefinitely stifled by current government 
impediments to the market.


Religious faith has sharply increased since the collapse of the Soviet Union. 
As one sociologist noted, "in a remarkably brief period of time, Russia has 
become one of the most God-believing countries in Europe." Interestingly, the 
revival of faith in Russia is concentrated among the young and the educated.


Despite the Soviet legacy of outlawing private civic organizations, a number 
of civic groups have been founded in recent years. The number of human rights 
organizations has grown from 50 in 1996 to over 1,200 in 1999. According to 
the U.S. Agency for International Development, there are now approximately 
65,000 active civic and social groups of all kinds in Russia.


Russia's rich culture, which ties its people together and is universally 
admired, also provides a base upon which the nation is building anew today.


The successful elevation of Vladimir Putin to the Russian presidency is 
widely attributed to the public longing for order after a decade of chaos. 
But despite the unmistakable public clamor for a crackdown on crime and 
corruption, public opinion surveys show that a majority of Russians are not 
prepared to give up their most cherished and hard-won liberties. An August 
1999 U.S. Information Agency survey found that 73% of respondents opposed 
loosening restrictions on police and security forces, 66% opposed banning 
meetings and demonstrations, 62% opposed canceling elections, and 53% opposed 
media censorship.


Russia is a great nation, and must eventually determine its own course. If it 
is to successfully make the transition from nearly a century of Communism to 
a free enterprise democracy built upon individual decision making and 
individual rights, it will be because of the determination of Russia's people 
to do so. As the world's leading free enterprise democracy, the United States 
offers the quintessential model for Russia's future, if Russia chooses 
freedom. It was in 1992, and is now, America's opportunity--if not our 
duty--to respond.



America and Russia have lost a decade. The growing estrangement of Russia 
from the United States, the hostility to American interests reflected in 
Russia's foreign policy, and the telltale signs of authoritarianism in the 
post-Yeltsin era provide ample evidence that Russia faces a more formidable 
task because U.S. foreign policy was weak, and did not lead. But it is not 
too late for the United States to stop impeding and start assisting the 
transition from Communism to free markets, from authoritarianism to 
democracy, and from disorder to order. It simply requires that we begin 
anew--but this time, with a clear purpose.


******