The Heritage Foundation

Backgrounder Update #167

August 26, 1991

August 26, 1991 | Backgrounder Update on

The New Soviet Reality: How Washington Should Respond

(Archived document, may contain errors)

167

THE NEW SOVIET REALITY: HOW WASHINGTON SHOULD RESPOND

(Updating Executive Menwrandurn No. 307, "How America Should Respond to Moscow's August Putsch: Nine Guidehnes:'August 20,1991.)

The dramatic changes in Moscow and throughout Russia and the other Soviet Republics require appropri- ately dramatic changes in America's policies towards the Soviet Union. No longer can the Bush Administra- tion remain reluctant and begrudging in its support of Boris Yeltsin and other democratic reformers. No longer can the United States balk at recognizing that power and legitimacy have shifted to the Republics fi-om the central government of the U.S.S.R. Washington now must begin leading the international response to last week's dramatic events. Washington must tilt away fiom the Center-as the central Soviet government is known-and tilt toward the Republics. Washington must abandon its determination to preserve a unified U.S.S.R. and begin endorsing independence for the Republics. No longer must America warri the Republics, as George Bush did just a few weeks ago in Kiev, about "suicidal nationalism" and lecture the reformers that "freedom is not the same as democracy." Washington must abandon its implicit though strong support for central economic control in the U.S.S.R. and take explicit action to help the Republics create market economies. A comprehensive American program for addressing the new reality in the Soviet Union, of course, will take some time to craft As events unfold there, new responses will be required from Washington. As a suirt, however, the United States should: 1) Recognize the independence of those Republics declaring independence. 2) Resist the calls from Bonn and otherWestem capitals for massive, emergency aid for the U.S.S.R. It is not a lack of such aid that triggered last week's near-tragic events. It was Mikhail Gorbachev's lack of commitment to genuine political and economic reform. If anything, the aid that the West had sent impeded the economic reforms and gave Gorbachev the feeling of false confidence that surely al- lowed him to go slow on reforms. 3) Offer the Center no aid, credits or any other help. These will delay reforms. All American help must go to the Republics. 4) Recognize that the most valuable American help is open, bold exhortations to the Republics that they now must push fast for economic and political reform.

5) -Recognize that reforms will be helped least, and even may be hindered, by the direct transfer of - money or credits to the governments of the Republics. If America sends funds they should go to pri- ,vate and cooperative banks, investment pools and other entities to be tapped by entrepreneurs. 6) Lindt other direct American financial aid to that specifically designed to ease the pains of transition to a market economy. To ensure that the aid interferes as little as possible with market functioning, the .aid could fund vouchers for Soviet consumers as a cushion against rising prices and other market- driven adjustments. No aid should subsidize production of any goods or services. 7) Lindt humanitarian aid, as winter approaches, to food and similar emergency provisions. While such charity is appropriate and worthy of America, Washington must understand that 40 years of humanitar- ian aid to Third World countries has undermined their economic development. 8) Refuse to guarantee private bank loans to the Soviet Union or to the Republics. Guarantees massively distort market signals and almost ensure that the money is used neither wisely nor efficiently. Ameri- can banks eagerly will lend money to enterprises in the Republics, or even to the Republics them- selves, without guarantees when the banks believe that reforms are changing the Republics' econo- mies sufficiently to enable the loans to be repaid. In fact, the best sip that the Republics are on the right economic course will be an awakening interest by American banks in lending to the Republics. 9) Increase dramatically the commercial staffs at the U.S. Embassy and other diplomatic missions in the U.S.S.R. New U.S. consulates and other offices immediately should be opened throughout the Repub- lics. These commercial officers can identify investment opportunities for American fmns and help American investors navigate in what will be, for some time, the murky commercial waters of the Re- publics. 10) Increase dramatically funds for the National Endowment for Democracy to establish academies throughout the Republics to teach the fundamentals of commerce-accounting, personnel manage- ment, banking and finance, advertising, marketing, cash-flow analysis and so forth. 11) Block attemptsby the International Monetary Fund, World Bank and other United Nations and inter- national agencies to transfer funds directly to the Soviet government.

Burton Yale Pines Senior Vice President

Kim R. Holmes, PhD. Director of Foreign Policy and Defense Studies

About the Author

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