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Committee on Financial Services

United States House of Representatives

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CURRENCY
Committee on Banking
and Financial Services

James A. Leach, Chairman

For Immediate Release:
Thursday, June 10, 1999 Andrew Parmentier (202) 226-0471

Opening Statement
Of Representative James A. Leach
Chairman, Committee on Banking and Financial Services
Hearing on Russian Economic Turmoil

This is the third in a series of hearings on key issues in global finance. The purpose of our session today is to examine the state of the Russian economy and United States policy toward Russian economic reform. Next week the Committee will examine the important issue of debt relief for the world’s poorest countries and several reform proposals for the Heavily Indebted Poor Countries (HIPC) initiative.

We have before us several distinguished panels of witnesses. We are extremely fortunate that the Hon. Curt Weldon, Chairman of the Duma-Congress Study Group and one Congress’ foremost authorities on Russia, has agreed to share his perspective on the state of U.S.-Russian relations.

I would also like to extend a warm welcome to Assistant Secretary Truman, who is making his maiden appearance – perhaps we should say baptism by fire – before the Banking Committee. For many years Ted worked closely with this Committee as chief international economist at the Federal Reserve, and he brings a wealth of macroeconomic experience to his new position at Treasury. We also have a third panel of experts from the think-tank as well as business community.

As my colleagues know, in addition to Treasury, a witness from the Department of State had been scheduled to appear before the Committee to explain how the U.S. bilateral foreign aid program for Russia complemented the activities of the international financial institutions in promoting democratic and market reforms. Inexplicably, however, the State Department withdrew its witness at the 11th hour.

This hearing involves the interplay of three issues – international economics, foreign policy, and finance – with U.S. public policy.

As we all recall, last July the IMF announced a $22.6 billion package of loans designed to support major fiscal and structural reforms in Russia. One month later, in the midst of collapsing market confidence, Russia devalued the ruble and froze some of its foreign and domestic debt. Russia’s economic reforms were seriously derailed and, its relations with the IMF put on hold, while global financial markets reeled from this unexpected shock.

Nevertheless, it soon became evident that without new IMF loans, and the Paris Club debt restructuring a Fund program might facilitate, Russia would default on its foreign loans. For a time, the tepid interest of the Primakov government in an economic reform agenda, coupled with allegations that a Channel Island-registered investment firm (FIMACO) had illegally mismanaged billions of Central Bank reserves and IMF credits, clouded prospects for continued Western engagement.

In the end, perhaps inevitably, Russia and the West opted for continued engagement, with agreement on a minimalist new IMF program forming the basis of a limited set of commitments which may move Russia further towards a market economy.

There are points were foreign policy and economics intersect, and when the political process implodes, as it did in Russia, economic consequences follow. The best and the brightest on Wall Street lost billions betting that Russia was "too nuclear" to fail. They didn’t grasp that it was too corrupt to succeed and that it did little good for the West to transfer resources to Russia’s Central Bank if it simply recycled them to a private banking system which served as a money-laundering network for insiders.

From a Congressional perspective, last August’s Russian financial meltdown prompts two self-evident policy questions. First, should the U.S. be prepared to support bilateral and multilateral assistance for Russia, and if so, under what conditions? Second, what lessons have we learned about what does and doesn’t work in Western efforts to facilitate Russia’s peaceful transition to a market-oriented democracy?

While isolationism is always at issue in our democracy, the American heritage involves a heavy dose of 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 interests. A peaceful and democratic Russia remains a compelling U.S. interest. Likewise, consistent with the most caring dimension of our foreign policy tradition, Americans support continued humanitarian aid to afflicted peoples in Russia and elsewhere around the globe.

In this context, while Congress and the Executive Branch are prepared to support genuine Russian efforts to help themselves, it must be understood that Russia’s economy will remain hapless unless it deals effectively with corruption and establishes 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 because of the Big "C" – Communism – and is now being kept back because of the little "c" – corruption – which is likely to be more difficult to root out than Communism was in the first instance.

To date, there is little evidence that the latest Fund program will pass the crucial test of credibility. It is more likely to be regarded as a transparent political expedient designed to reward Russia’s reluctant cooperation with NATO over Kosovo, while delaying – but not preventing – Moscow’s financial day of reckoning.

In terms of lessons, it is remarkable how little the Administration appears to have shared any post-mortem assessments of last summer’s financial debacle with Congress and the American people. But at least three lessons are evident.

First, an emphasis on structural and institutional reforms, particularly the development of the rule of law, is critical in post-communist societies. While the Russians themselves must remain primarily responsible for clearing away the rot in their system, it is appropriate for Congress to insist that Treasury and the international financial institutions – principally the IMF and World Bank – lead in pressing legal accountability reform in the best interest of the Russian people, rather than their governing elite.

In this regard, for the past decade I have been urging the World Bank to emphasize, above all, the development of a sound financial infrastructure in the developing world. No economy can prosper without competent, honestly regulated financial services providers. In light of the manifest lack of progress on core governance, banking reform, and rule of law issues, Congress needs to determine whether the multilateral development institutions principally responsible for promoting structural reform in Russia are providing help for the few, or the many.

A second lesson is that economic reform programs cannot succeed without the strong support of the borrowing country. But while official creditors loudly trumpet their commitment to the policy that borrowers should take "ownership of reform," they fail to mention the escape clause for countries thought too strategic to fail. After all, it is self-evident that the West’s perceived strategic imperatives in countries such as Russia, Ukraine, and Pakistan trump longer-term "ownership of reform" initiatives every time.

A third lesson applicable to our bilateral aid program is that, contrary to the priorities of so-called realists at the State Department, exchange programs are likely to prove more effective than resource transfers. People-to-people exchanges expose the American model to young Russians trying to make democracy and capitalism work for their country and they underscore the immense goodwill Americans have toward Russia and Russians in the wake of the collapse of the Communist system. Exchanges are very much in our long-term national security interests. They should be increased, not cut back.

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. Whether this or any prospective Russian government is willing and capable of committing to such an undertaking, should be at the heart of our hearing today. I look forward to a stimulating discussion.

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