July 1, 1998

July 1, 1998 | Commentary on Russia

ed070198: Journal: Heritage Visitors to Russia

1) The Russian economy. Russia is going through yet another economic crisis. It has two parts: a) the budget crisis, resulting from overspending and low tax collection; and b) the crisis of confidence in the ruble, caused by the budget crisis and a depletion of currency reserves, which sparked the recent IMF bailout.

a) The budget crisis. Despite privatization, the size of government is actually growing in Russia. Arthur Andersen estimates that while the population of Russia is half that of the Soviet Union, the Russian bureaucracy has grown three times since the collapse of the USSR (which means there are six times more bureaucrats per capita than before!). Since taxes are so high, and most of the economy is in barter, tax evasion is rampant. As result, tax revenues are dropping while spending is growing; hence, the yawning budget deficit. The result: Vast numbers of bureaucrats and soldiers simply are not paid, and much of the economy is conducted by barter.

b) The crisis of confidence. This huge budget deficit contributed to the crisis of confidence in the ruble, but a more immediate cause was corruption and mismanagement in the federal reserve system. Apparently, a depletion of reserves by the federal reserve bank caused the currency crisis. Where did the money go? Partly to the treasury to cover budget deficits; partly into "investments" (i.e., the stock market); and partly to cover costs of reserve bank employee salaries and construction costs for the bank itself.  None of these are the proper use of reserve funds. The IMF provided funds to make up for these losses, all for the purpose of preventing a devaluation of the ruble (which would have devastated the government bond securities in which Russia's oligarch's have so much invested).

In other words, the IMF provided loans not only to cover Russia's rich oligarchs, but to replenish funds that were irresponsibly diverted into improper uses. Few believed that Russia will follow through on any of the reforms promised to the IMF.

As you consider this IMF saga, remember one thing: because of Russia's mismanaged economy, around $40 billion of Russian capital has left the country. If this money were to stay in Russia, there would obviously be no need for IMF bailouts.  But capital flight will not end unless the economy is fundamentally overhauled, something which the Russians promise the IMF, but never deliver. Lacking real reforms, the main benefit of the IMF bailouts is not reform, but relieving the pressure to reform-and keeping the ruble valued at artificially high rates so that the oligarchs can earn high percentage interest on government bonds.

What keeps the Russian economy going? Most of the economic growth is concentrated in Moscow and the oil regions, but the short answer to this question is: oil and mineral exports; arm exports; criminal and black market (and barter) activity; and speculation on the stock and bond markets. Some parts in the Far East are growing, but the vast rural areas and most cities besides Moscow are in deep depression.

2) Status of the ABM Treaty.  A top foreign ministry official said that Russia alone was not the legal successor to the Soviet Union on the ABM Treaty-a position directly at odds with the Clinton administration's latest position which says that as of now Russia alone is the legal successor. Rather, Russia, Kazakhstan, Ukraine and Belarus are the legal successors (i.e., the signatories of the New York successor agreement). A high level source at the national security council echoed this view. Why is this important? Not only because it contradicts the position taken in Bill Clinton's last letter to Helms and Gilman, but because it strengthens the argument that the ABM Treaty cannot be legally binding until the Senate ratifies the successor agreement now recognized by the Russians.

3) START II.  Yeltsin's officials claimed that START II eventually will be ratified by the State Duma. Opponents in the Duma claimed it will not be. The bottom line, according to a top official at the U.S. Embassy, is that START II will probably not be ratified anytime soon. The official thinks it will be ratified only when the Russian military and the Duma start crying uncle about the costs of not implementing it. Most of the Duma's opposition to START II is blatant anti-Americanism mixed in with contempt for Yeltsin. The START II debate in the Duma is driven not by technical arguments, but by politics. The only legitimate argument against START II comes from some Duma members who want the administration to explain Russia's long-term strategic plan before they vote for START II.

4) U.S.-Russian cooperation on missile defense.  The idea of the U.S. and Russia cooperating on missile defense systems was greeted mostly by skepticism. A high level official in the Foreign Ministry demanded not only that Americans pay for most of the missile defense system to protect America and Russia, but that Russia be given joint command and control and full access to our technology base. Short of that, he said, "we stick with the ABM Treaty." The Russians would likely back off this hard-line position if they knew the U.S. was serious about deploying missile defenses. The Russians know that their nuclear weapons are the only thing that keep them from being considered a Third World country. They want to keep their nukes, and to keep them targeted on the U.S., because it gives them prestige, influence and leverage in world politics. This is why their price for cooperating on missile defense is so high. However, as they have done in other negotiations, when they see they have no choice, they would drop their staunch opposition and jump on the bandwagon of mutual defense cooperation.

5) The world according to Primakov.  A top U.S. diplomat said that Foreign Minister Primakov is influential in security and geopolitical issues, but that he has little or no influence on the "big questions" involving money. That is why Chubais was the IMF negotiator, not Primakov. Yeltsin will let Primakov play in his geopolitical sandbox of arms control and Caucasus oil politics. He is useful to Yeltsin as a sop to the communists who still harbor imperialist dreams. Primakov's pro-Arab and pro-Iranian sympathies fit nicely with the Russian desire to make money by selling arms to the Iranians and others. His views are not so much the driving force behind their pro-Iranian, pro-Iraqi policies, as they are a policy compatible with Russia's economic interests.

6) Proliferation.  The main reason Russia is not serious about cooperating to stem proliferation is money. The Russians stand to make a great deal of money exporting arms to countries like Iran. A high level national security council official said that trade with Iran is "vital." He played lip service to countering proliferation, but he admitted that there were problems at the "practical level" of implementation. In other words, he was more or less admitting that controlled nuclear and missile technologies had leaked to Iran. In the long run, they realize that this is potentially dangerous, but their short-term interest in money and in countering American "dominance" (Primakov's word) in the region are more important.

Kim R. Holmes, Ph.D. is Vice President of Foreign and Defense Policy Studies and Director of the Kathryn and Shelby Cullom Davis Institute for International Studies at The Heritage Foundation.

About the Author

Kim R. Holmes, Ph.D. Distinguished Fellow
Douglas and Sarah Allison Center for Foreign and National Security Policy