Statement for the Record
by Ambassador Richard L. Morningstar
Special Advisor to the President and Secretary of State
on Assistance to the New Independent States
House Appropriations Committee
Subcommittee on Foreign Operations
April 9, 1997
Mr. Chairman and members of the Subcommittee, I am very pleased to
have the opportunity to testify here today about the Administration's
plans for assistance to the New Independent States of the former
Soviet Union, and most importantly about one of the President's top
priorities in the foreign affairs budget, the Partnership for Freedom.
The FY98 budget request for NIS assistance is $900 million, up from
$625 million in FY97. The Partnership for Freedom supplies the vision
and the framework for sustainable, mutually-beneficial cooperation
between the people of the United States and the people of the New
Independent States, and thus for a more secure and prosperous future.
Partnership for Freedom rests on a simple principle: the security of
the United States and the rest of the world is immeasurably enhanced
if Russia, Ukraine and the rest of the NIS are stable market
democracies. We must take specific actions to help these countries
attain economic growth. Lack of growth will ultimately lead to
destabilization which could raise new threats to our national
security.
We must also accept the fact that reform in the NIS is a complex
generational process, the outcome of which is, today, not yet secured.
For example, although last summer's presidential election in Russia
was remarkably free and fair, a monumental signal in its own right of
reform's progress, 40% of Russian voters opted for the past. Many
people in the NIS are still significantly worse off economically than
they were in the Soviet Union. We must stay visibly and materially
engaged to help ensure that lasting democratic and market institutions
take root and prosper in the region. Over the next few years, we must
help give people throughout the NIS region a more tangible stake in
reform. The cost of this investment is small relative to the
far-reaching benefits that stable, democratic New Independent States
hold for the American people.
Last month in Helsinki, Presidents Clinton and Yeltsin issued a joint
statement outlining their commitment to stimulating investment and
growth in Russia, and to advancing Russia's membership in
international organizations. Included in this statement was President
Yeltsin's agenda to launch Russia on to its next phase of reform,
including comprehensive tax reform, laws to strengthen the Production
Sharing Agreements needed for energy sector investment, tough
anti-crime laws, and ratification of the U.S.-Russia Bilateral
Investment Treaty. Presidents Clinton and Yeltsin also applauded plans
announced by Vice President Gore and Prime Minister Chernomyrdin to
launch a regional investment initiative, that will attract resources
to key regions, including the Russian Far East. This initiative will
demonstrate the impact of joint efforts on policy reform, investment
finance, and the creation of new channels of commercial cooperation
between regions in both countries. Although the primary
responsibilities, and capabilities, for advancing the economic growth
and reform agenda lie within Russia, this recognition that joint
efforts between the United States and Russia play a significant,
mutually beneficial role in the process is an underlying assumption of
the Partnership for Freedom.
With Congress' support, the Partnership for Freedom will respond to
this imperative. The United States represents the potential of
democracy like no other nation in the world, and thus our visible
engagement in the reform process provides a crucial boost to the
hundreds of thousands of people with a new voice, and new economic
opportunities, in the future of their nations.
The Partnership for Freedom will deliver a strategic refocus of our
approach to assistance, focused on fostering economic growth and
investment, and no less important, on strengthening the myriad of new
democratic institutions, most of them non-governmental, that have
emerged over the past five years. These dual tracks for a
reinvigorated program will give us the greatest chance of success in
sustaining the political impetus for reform and democracy.
It is particularly important that Partnership for Freedom will be even
more significant at the times that tensions between our nations are
high. Business, people-to-people, and community ties are mechanisms
which increase the survivability of stable market democracies over the
long term, whatever the political situation is at a given point in
time.
Phase I -- U.S. Assistance from 1992 to the Present
We can consider the first phase of our engagement in the NIS to be
complete when basic structural and institutional changes to a market
democracy have taken place, such as:
Private ownership -- the private sector's share of GDP is now over 60%
in Russia, 50-60% in Moldova, 50% in Ukraine, 40% in Kyrgyzstan, and
35% in Kazakhstan. Privatization to this degree is a key building
block for future economic reform and growth.
Elections -- reasonably fair and open elections have had a significant
impact on the political process in Russia, Ukraine, and Moldova --
Russia now has held parliamentary, presidential, and regional
elections since December, 1995. In those countries whose commitment to
elections and independent political parties appears more tenuous, and
where elections have been tainted, political leadership has had to
accept the consequences of international scrutiny and condemnation.
Civil society -- non-governmental organizations (NGOs) did not exist
in the NIS in 1992. Since that time, there has been explosive growth
in this sector, particularly in civic associations, policy think
tanks, private universities, business and industry associations,
citizen action groups, environmental groups, and many more varieties
of public interest and advocacy organizations.
In addition to what is outlined above, other key building blocks are
the rule of law, independent media, and functioning capital markets
and financial institutions. Russia is closest to meeting these
criteria, and Moldova, Kyrgyzstan, Ukraine, and Georgia are next in
line. The other NIS countries are reforming at a slower pace.
The Administration's current proposal for introducing the Partnership
for Freedom creates a staggered transition for the NIS countries from
broad-based technical assistance programs to the concentration of
resources on fewer activities. For example, over 91% of the FY1998
program in Russia will be under PFF, in Ukraine, 51% under PFF and in
Kazakhstan, 53%. Over the next four to five years, technical
assistance will phase out in each country, and the longer term
framework for remaining Freedom Support Act activities in the New
Independent States will be the Partnership for Freedom package.
Phase II: Partnership for Freedom
The United States and the New Independent States ultimately want
constructive bilateral relationships based on mutual respect and
mutual geopolitical, economic and trade interests, not relationships
based on assistance as such.
The Partnership for Freedom will include the following activities:
I. Investment and Capital Mobilization
1. Increase investment support in the regions, emphasizing the
involvement small business and microcredit.
-- implemented through Eurasia Foundation, selected USAID grantees,
EBRD Small Loan Program, USAID Loan Guarantees for Micro & Small
Enterprises, Eximbank, OPIC, Trade and Development Agency, science &
technology foundation
-- up to $163 million
2. Continue support for NIS enterprise funds.
-- up to $64 million
3. Remove impediments to trade and investment.
-- Targeted technical assistance for tax reform, WTO accession, legal
reform, and accounting standards reform
-- $20 million
4. Facilitate and accelerate World Bank and other IFI loans to NIS
governments.
-- help NIS governments meet the structural reform conditions required
by the World Bank and IMF for the release of major loans
-- $12 million
5. Link business training to specific investment projects involving
U.S. companies and capital.
-- improve capabilities of enterprise managers, particularly in the
regions, in those enterprises engaged in trade and investment with
U.S. companies, small loan programs, and enterprise funds.
-- $17 million
II. Consolidation of Democracy and Civil Society Gains
1. Significantly expand law enforcement and criminal justice reform
activities to address problems of crime and corruption.
-- increase training in financial fraud, money laundering, organized
crime, anti-narcotics, bank inspection; increase support to the
International Law Enforcement Academy (ILEA) in Budapest for training
NIS law enforcement professionals; provide non-lethal material
support, such as forensics, computer and communications equipment;
increase training for judges and prosecutors
-- $29 million
2. Endow foundations to create sustainable support for new democratic
institutions.
-- create long-term vehicles for U.S. support for democratic
institutions such as NGOs, independent media, citizens' advocacy
groups that will carry on beyond the end of U.S. bilateral assistance
activities
-- select foundations to be endowed partially on the basis of private
matching funds
-- $41 million
3. Expand institutional partnerships to support cooperative activities
at community levels and expand cooperative activities in such areas of
mutual interest as health, environment, energy, and technology
commercialization.
-- support partnerships between business associations, hospitals,
universities, cities, bar associations, charities, and other
non-governmental organizations to foster and deepen commitments to
participatory civil society and productive, mutually beneficial
relationships between the NIS and the United States.
-- work through binational commissions with Russia and Ukraine
-- $59 million
4. Increase professional and academic exchanges with emphasis on young
leaders.
-- seek to more than double the number of NIS citizens coming to stay
in the U.S. for month, semester, and academic year programs;
recruiting business interns, young professionals, and students;
emphasizing community-based, home stay programs
-- $58 million
5. Strengthen democratic political organizations as they become part
of the greater network of citizens organizations.
-- continue political party development through IRI and NDI, and
support for election reform, and related NGOs and human rights
organizations
-- $28 million
The FY1998 request for $900 million is a 44% increase above the
current fiscal year's budget for the NIS. This level of funding,
combined with the strategic refocus of the program, will be able to
support at least double the number of exchanges and partnerships.
These funds will direct more than five times the amount of resources
into investment programs, and more than double the level of effort on
law enforcement and anti-crime activities compared to FY1997.
Another major effect of these additional ends will be more resources
for democracy and economic restructuring work in Central Asia (+60%),
Georgia (+60%) and Azerbaijan (+90%) -- countries of key geopolitical
and economic interest to the United States, that have not been
adequately supported due to overall budget constraints combined with
congressional earmarks. Russia's budget will be up significantly from
this year's $95 million to $241 million. Over 91% of the Russia budget
will be directed to PFF activities. The amount allocated to Russia is
still only 15% of that allocated in FY94.
The Partnership for Freedom is structured to operate in parallel with
U.S. government security-related programs to promote arms control,
nonproliferation, and regional stability. These include Department of
Defense programs for Cooperative Threat Reduction,
Counterproliferation, and Warsaw Initiative/Partnership for Peace
efforts, as well as Department of Energy programs such as the
Materials Protection, and Control & Accounting activities. The PFF
helps to strengthen our efforts in these security areas, and vice
versa. All of these programs should be reviewed as a cohesive package,
which together fulfill U.S. national security objectives.
Lessons Learned
I have been in this position now for over two years. The approach that
I have taken in this time period, and presented to this committee on
numerous occasions, has been aggressively focused on the notion of
continuous improvement to maximize our effectiveness in meeting U.S.
national interests, and to maximize our return on the investment of
U.S. taxpayer dollars in the reform process. The implementing agencies
and organizations have accomplished a tremendous amount in this
regard, and Mr. Dine will get into more of that detail for USAID later
in this presentation.
We have learned how far small amounts of funding can go to support
reformers in real and lasting ways. Smaller, regionally based
programs, that are encouraged to be flexible and adapt to local needs,
work best. We have never, and will never, invest as much as it would
take to do it all, to make "the" critical difference. I actually do
not believe that is even possible. But, we have made, and must
continue to make, many small differences. Today, regions in Russia
such as Novgorod, Samara, Nizhny Novgorod have become models of
accomplishment for the rest of the country on what is achievable by
taking advantage of targeted assistance programs. We must and will do
more in regions to create visible community-based impact. The heroes
of the new market democracies in the NIS are not USAID, not the World
Bank, not the EBRD; they are the people that we have supported,
educated and made small loans to over the past five years --
reformers, entrepreneurs, and advocates for change from all levels of
society, who deserve the credit for all the real and lasting
accomplishments. They are winning a courageous battle.
We have learned that cost sharing works. Programs such as USAID's
small business service centers and the Morozov small business training
project in Russia have achieved 40% to 50% cost recovery from
fee-for-service. The programs that recruit volunteer experts to assist
and train private entrepreneurs and farmers all rely on major cost
sharing with their NIS clients, in addition to the valuable, donated
time of the skilled Americans who volunteer. One of our most important
exchange programs, Community Connections, (also known as PEP in some
regions), is achieving great success in a pilot effort to have the
professional exchange participants pay all of their travel costs to
the United States, and some of their per diem expenses while they are
here. All of these community-based exchanges receive a tremendous
amount of in-kind contributions of organizing time, accommodations,
local transportation and training from American communities all over
the country that host these NIS groups. We have found that people who
have a financial stake in the program will make the best use of it.
We have learned that the time lag between capital availability in our
investment programs, such as TUSRIF, OPIC, EXIM and our various funds,
and the disbursement of that capital has been partially unavoidable,
as the NIS entrepreneurs come up the learning curve, and the
impediments to investment in these countries remain numerous.
Nonetheless, we have also observed that with skilled shepherding, and
high quality training of local financial institutions, more can be
achieved -- particularly with smaller projects and companies, and that
we can now direct more resources where there are gaps, and make the
necessary adjustments to the programs.
We have learned that it doesn't make sense to spend assistance dollars
on restructuring large, formerly state-owned companies. Companies with
a chance of pulling through this transition will be able to find the
resources to pay for the consulting or training that it needs. Many
business services providers exist now, both indigenous and foreign. We
have ended programs that were funded back in 1994 and 1995 to do this
kind of work, and retargeted private enterprise training resources to
small and medium enterprises. NIS governments must play a critical
role, as reform legislation is required to allow enterprises to sell
land and other assets, shed some of the burdens of social services,
and make a fair return on investment in a rational tax environment.
We have learned that we can accomplish tremendous leverage by focusing
our technical assistance in some instances on helping the NIS meet
structural reform conditions for major loans from international
financial institutions. We, and most importantly the NIS side, achieve
a tremendous return on our assistance investment through this kind of
coordination. In Ukraine, a good illustration of this is the $317
million World Bank electric power loan, which began disbursing last
month. Our technical assistance to the Ukrainians helped them organize
and implement a wholesale market for power, one of the most complex
conditions the Ukrainians had to meet in order to secure this loan,
and a key building block for a sustainable, market oriented power
industry.
We have also re-learned some old lessons about U.S. assistance -- that
well managed, internationally coordinated humanitarian assistance
efforts can save lives and help to maintain the stability of a region
or country. In Armenia, Georgia and Azerbaijan, a region that faces
numerous ethnic and cross-border conflicts since the break-up of the
former Soviet Union, U.S. resources and leadership to bring in food,
fuel and medical commodities and to fund the Caucasus Logistics
Advisory Unit, have made a difference in helping these nations get
through their most challenging early years. President Shevardnadze has
stated on several occasions that it was U.S. humanitarian assistance
that made the critical difference in helping Georgia maintain its
stability and independence. The leverage that we have been able to
achieve in our humanitarian program since inception in the NIS is huge
and has often gone unnoticed -- $1.6 billion worth of 100% donated and
surplus commodities delivered to 12 NIS countries in 480 airlifts,
costing under $174 million in transport (through the end of calendar
year 1996). We should be very proud of this accomplishment.
Russia
While recognizing that some crucial forms of technical assistance,
particularly those that address key impediments to investment like tax
reform, will require continued work, the implementation of the
Partnership for Freedom in Russia will create a much greater emphasis
on Russia's regions and will address the following goals:
1. Working with regional governments to address key obstacles to
investment, helping them to gain access to international capital
markets, and strengthening regional financial institutions.
2. Increasing the availability of financing in the regions through
EXIM, OPIC, the U.S.-Russia Investment Fund, other small and
medium-sized lending and equity investment programs, and microcredit
activities.
3. Increasing the level of support for exchanges and regional and
community-based institutional partnerships, that will link cities,
universities, law schools, policy think tanks, and a variety of NGOs
and citizens' organizations.
This regional approach to the PFF in Russia has been developed through
extensive consultations with numerous American and Russian
professionals and policymakers in the field of investment and economic
development in Russia, who have identified the gaps in financing
programs to date to be a lack of credit for smaller businesses in the
regions. Vice President Gore and Prime Minister Chernomyrdin
highlighted the importance of a regional investment initiative in a
joint statement at the last meeting of the U.S.-Russia Binational
Commission in Washington this past January. The Russian Far East has
been acknowledged by both the U.S. and Russia as a region of great
economic potential and will be included in this initiative. Other
potential participating regions include oblasts in the Urals region
and the Southern Russia-Volga region.
One extremely promising oblast in the Northwest of Russia, Novgorod,
has been identified as an appropriate area to launch a "quick start"
demonstration of the PFF and the regional investment initiative, due
to the regional government's reform action, strong interest from the
U.S. business community in Russia, and a significant level of existing
assistance resources and programs on which to build.
The Novgorod region, with a population of about 750,000 people, today
provides one of the most compelling illustrations of Russia's promise
to become a prospering market economy. Although the region suffers
from the same fundamental economic and structural problems as the rest
of Russia, it leads Russia with the highest per capita foreign
investment. Perhaps not coincidentally, Novgorod has one of the oldest
traditions of democracy in Russia. Founded in the 9th century,
medieval Novgorod was governed by an assembly of its citizens, the
"veche"; and prior to the establishment of St. Petersburg, was the
major trading center of Northwest Russia. Now, through the dynamic
leadership of its elected governor, Novgorod has established an
investment-friendly climate, and has been recognized by the American
Chamber of Commerce in Russia as one of the most progressive regions
of Russia today. This region is not waiting for a handout, but instead
is working diligently to enact reforms that have mobilized capital
investment. This region, and others like it, should be the foci of our
assistance effort through the Partnership for Freedom; there is no
point to these programs if the local leadership, both in government
and in the private sector, is not a major part of the solution, and
willing to act to create real opportunity for the future.
One component of the PFF, "partnerships and cooperative activities" is
best understood through the examples of working partnerships in the
region. One notable example happens to be in Russia -- the partnership
between the World Institute for the Disabled and the All-Russia
Society of Disabled. With the material support, know-how, and
encouragement of their U.S. partner the Russian group's membership has
climbed to 2.4 million in 78 different regions. They have helped
members set up over 1700 enterprises, as well as manufacturing
companies that make wheelchairs and other equipment for the disabled.
Their public education and outreach, leadership training, legislative
advocacy, and efforts to bring disabled children more into the
mainstream of Russian life add up to an incredibly powerful lesson for
all NGOs in the NIS. Partnerships such as this one must have an
important place in our long term engagement with Russians through the
Partnership for Freedom. Many more existing relationships between U.S.
and Russian organizations will be able to have significantly greater
impacts on their communities with relatively small amounts of money.
Ukraine, Central Asia, the Caucasus
The non-Russian NIS are still facing the most fundamental challenges
of building new market democracies. These nations are building all of
their government institutions from the ground up. The rule of law,
media, and basic market institutions, such as banks, capital markets,
and regulatory-institutions are also at early stages in their
development. Our national interest in supporting these countries
through their transitions is clear. The Partnership for Freedom
approach, and the Administration's FY1998 budget request of $900
million, will allow the appropriate level of assistance resources to
be directed to the non-Russian nations.
In Ukraine, with the second largest population and economy of the NIS,
stability and growth are crucial to a secure and undivided Europe.
Several events in 1996 indicate that reform efforts in Ukraine are
progressing, but there have also been disappointments. On the positive
side, the last nuclear weapons were removed from Ukrainian soil in
May: a democratic constitution was adopted in June; the new currency
was successfully introduced in September; the U.S. and Ukraine
declared themselves to be "strategic partners"; and President Kuchma
introduced an extremely ambitious economic restructuring package to
the Ukrainian Parliament in November. The difficulties that we see now
are evident in the stalling of this economic restructuring package in
the Rada, and a worsening environment for foreign investment,
evidenced by several well publicized cases of U.S. companies facing
serious harassment and corruption, and the recent pull-outs by
Motorola and Marathon Oil.
Assistance to the fledging market democracies of Central Asia and the
Caucasus are strongly in our national interest. Their strategic
location between Russia, the Middle East, and China, coupled with vast
energy resources, make their stability vital to U.S. interests. We
will continue to help nascent democratic organizations and
institutions, such as the independent media, non-governmental citizens
groups, and educational institutions, establish active, effective
roles in these countries. Economic restructuring and support for small
businesses will also continue to be a prominent part of our assistance
program in Central Asia.
The Administration continues to oppose Section 907 of the Freedom
Support Act, which since its inception in 1992, has hindered U.S.
policy interests in the Caucasus region and Azerbaijan by severely
limiting the promotion of U.S. investment, the encouragement of
democratic and market development, and the advancement of the
Nagorno-Karabakh peace process. We view our assistance efforts in the
Caucasus region as a vehicle for furthering our policy objectives and
interests in the region. The loss of U.S. influence in Azerbaijan
threatens to undermine overall efforts for peace in the region.
Conclusion
The courage of the citizens of Russia and the New Independent States
to stay on the path of reform is bolstered by our investment in
democracy, free markets, and building strong people-to-people linkages
with Americans. We must consider the strategic importance of Russia
and the NIS both in a historical context, and as a part of our vision
of the world that our children will inherit. The New Independent
States greatly appreciate U.S. assistance, but do not want to rely on
aid. The Partnership for Freedom is one of the top priorities of the
Administration's foreign affairs budget. This is because the vital
importance of constructive, mutually-beneficial relations with the
NIS, and, as Secretary Albright recently expressed it in recent
testimony, "the ultimate victory of freedom over despotism" are so
important for the security of every American. U.S. assistance to date,
and looking ahead to the Partnership for Freedom, is one of the
smartest investments we can make to help insure the security, health
and prosperity of future generations.
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