US Assistance & Economic Cooperation Strategy for Russia United States Assistance and Economic Cooperation Strategy for RUSSIA Update approved by the Coordinator of U.S. Assistance to the New Independent States February 3, 1995 CONTENTS I. OVERVIEW OF U.S. STRATEGY II. STATUS OF RUSSIA'S ECONOMIC AND POLITICAL TRANSITION A. SIGNIFICANT DEVELOPMENTS IN 1994 B. CONTINUING CONSTRAINTS AND CHALLENGES III. U.S. ASSISTANCE PROGRAM ASSESSMENT A. PROGRESS TOWARD OBJECTIVES B. STRATEGIC ISSUES AND IMPLEMENTATION EXPERIENCE IV. PROGRAM PLAN AND OBJECTIVES A. TRANSITION TO A MARKET ECONOMY B. DEVELOPMENT OF DEMOCRATIC SYSTEMS C. MANAGING THE HUMAN DIMENSION OF TRANSITION V. CONCLUSION--IMPLICATIONS FOR LONG-TERM U.S. INTERESTS I. OVERVIEW OF U.S. STRATEGY Since the collapse of the Soviet Union in December 1991, Russia has been in the process of transforming itself from an authoritarian state and centrally planned economy to a more open, democratic society and market-based economic system. While Russia has made considerable progress on some aspects of democratic and market reforms, much remains to be done to complete the transition. And as would be expected in a more open political system, there are sharply differing views within Russia on how to proceed. The outcome of this reform debate will have far-reaching consequences for the United States, which for nearly five decades of Cold War viewed the nuclear-armed Soviet Union as its main adversary. A democratic, market-oriented, stable Russia can serve as a positive force in world affairs and a constructive partner on a wide range of global issues. The benefits to the United States of a reforming Russia are direct and tangible, including reduced defense requirements, expanded opportunities to market U.S. goods and services to a country of 150 million with enormous pent-up demand, cross-fertilization of scientific and technical knowledge among some of the world's leading scientists and increased cooperation on global environmental issues. Conversely, a Russia in political and economic turmoil would have the potential to destabilize the region and adversely affect a variety of U.S. interests. Over the past three years, the U.S. assistance strategy has evolved in response to changing needs and conditions in Russia as well as availability of resources. During the early phase of transition, humanitarian aid loomed large in our assistance program because of the pressing need for food, medicine and other essential commodities. As demand for humanitarian assistance declined, the U.S. moved quickly to expand technical assistance, training and exchanges directed at helping Russia create the laws, regulations and institutions necessary for a democracy and market economy to function. Now that elements of a market economy have begun to emerge, the U.S. has placed more emphasis on helping Russia spur private sector development by increasing direct support for trade and investment. At their summit in September 1994, President Clinton and President Yeltsin reaffirmed the common interests of the United States and Russia in maintaining a cooperative relationship. President Clinton pledged that the U.S., through a broad program of partnership, would continue to assist Russia in achieving its goals of fundamental democratic and market reforms. But the two Presidents also agreed that the United States and Russia should move as rapidly as possible beyond assistance to a normal economic relationship. The U.S. assistance and economic cooperation strategy for Russia is part of a broader strategy that encompasses all of the New Independent States (NIS) of the former Soviet Union. U.S.aid programs seek to encourage democratic and market reforms in all these countries. Russia figured prominently in the early phase of U.S. assistance to the region because Russia was in the forefront of political and economic reform and Russian developments influenced trends in all other NIS. With reform taking hold in Russia and U.S. assistance beginning to achieve its objectives, we are now in a position to start phasing down activities there and shifting even more resources to programs in other reforming NIS, while carrying through on core reform activities that are vital to consolidate the reform process in Russia. In the years ahead, U.S. assistance will be focused increasingly on promoting democratic and market reforms in the non-Russian NIS, and by 1998 all new assistance obligations to Russia are expected to cease (except perhaps to some extent for enterprise funds). Assistance from the United States and other donors is playing an important role in helping Russia grapple with key reform issues. In the end, however, the success of democratic and market reforms in Russia will depend primarily on what Russians themselves do. Effective government policy, growth of a dynamic private sector and active support of the Russian people will be key ingredients of success. In developing an assistance strategy, therefore, we have sought to focus limited U.S. resources on key areas that can contribute directly to systemic change and support reform efforts already underway within the government, the business community and nongovernmental organizations. II. STATUS OF RUSSIA'S ECONOMIC AND POLITICAL TRANSITION A. SIGNIFICANT DEVELOPMENTS IN 1994 Following the dramatic events of October 1993, Russia experienced relative political stability and the first measurable economic improvements since the collapse of the Soviet Union in December 1991. A new constitution was ratified by the electorate, and parliamentary elections were held peacefully and fairly. While many observers predicted reform gridlock following those elections, the reality has been more positive, with a number of important reforms enacted into law. Events in Chechnya beginning in December 1994 have cast a shadow over this relatively positive situation, the full implications of which are as yet unclear. Russia continued in 1994 its ongoing progress in achieving macroeconomic stabilization, with tight monetary and fiscal policies throughout much of the year bringing down inflation from twenty per cent per month to about ten per cent per month. But there was a temporary relaxation of these policies in mid-year to help struggling state farms and enterprises, a move that generated resurgent inflation followed by currency devaluation. In addition, declining tax revenues coupled with constant pressure for higher spending, resulted in a somewhat higher budget deficit for the year. Though the results are generally favorable, the lack of consistency does contribute to questions about Russia’s future course, and thus delays the growth of investor confidence. There was good news in 1994’s increase in consumption, indicating a rise in personal incomes. Production declines in large enterprises slowed so that industrial production statistics bottomed out in August 1994, and the output of small private businesses rose sharply. Direct foreign investment increased to an estimated $768 million in the first nine months, with the United States as the largest foreign investor. The transfer of state-owned assets to private shareholders has moved forward dramatically. Mid-1994 saw completion of the mass privatization program with 70 percent of non-defense enterprises -- approximately 80,000 small businesses and 14,000 larger firms -- privatized. As a result, 40 million Russians are now shareholders, and the privatized businesses are beginning the difficult but essential process of restructuring to produce marketable goods efficiently. Over 30 percent of households now occupy homes they own themselves. Positive developments can also be seen in the strengthening of democratic processes. Many grassroots citizen organizations have emerged and are become vocal advocates of diverse causes, including human rights and environmental protection. Citizens are sitting on juries in nine regions, and new political parties, labor unions and advocacy groups are being heard all across the political spectrum. There has been a significant devolution of administrative powers from the central government to the regions and municipalities. Russians in many regions now receive their news from independent newspapers, TV and radio stations, with an openness that at year-end was profoundly evident with their coverage of events in Chechnya. At the same time, it is necessary to watch closely the extent to which the Chechnya crisis affects the pace and prospects for reform. B. CONTINUING CONSTRAINTS AND CHALLENGES Russia's new political and economic institutions nonetheless remain fragile. Checks and balances among the different branches and levels of government are poorly developed and often non-existent. Executive branch authorities exercise what many observers consider excessive power for a democracy while the judiciary remains a weak institution. The relative calm in Russian politics during most of 1994 is attributed by some observers to the preoccupation of most Russians with fundamental issues of economic survival and to widespread disenchantment with politics generally. Anti-reform and extremist elements nonetheless remain a concern, and the various political, social and economic pressures inherent in this transformation are significant. The political effects of the Chechnya crisis including on reform remain to be worked out in the Russian political process. There is a strong and growing constituency for reform, but the democratic process and the Yeltsin government will face many challenges, including parliamentary elections scheduled for December 1995 and the scheduled Presidential election in 1996. A key factor in determining the survival and success of any new government is likely to be the extent to which reform is shown to benefit the many, not just the privileged few. The privatization of state-controlled enterprises remains incomplete despite the major progress made in 1994. Minority shares of privatized firms still in government hands need to be sold, and many of the largest and most inefficient enterprises --largely in the defense and energy sectors -- still need to be privatized and restructured. While privatization has created millions of new shareholders, infrastructure for capital markets is inadequate for large-scale trading in securities or raising capital for enterprise restructuring. A regulatory framework is also needed to protect shareholders' interests. In urban and adjacent areas, 42 million parcels of land have been privatized since 1990, and an active real estate market has begun to emerge. Though there are now approximately 300,000 private farms, in general the government has made significantly less headway in privatizing rural land and the former collective farms. Basic legislation has been drafted and is under parliamentary debate. However, the privatization of farm land in particular remains highly controversial. Russia lacks a tradition of private land ownership, and opposition to de-collectivization is a keystone of some of the stronger political parties. This issue must be addressed, because land privatization and commercialization of agriculture will be important for the success of overall economic restructuring. Although privatization has continued, some elements of the Russian political spectrum continue to oppose the opening of the Russian economy to foreign investment as a potential threat to Russian security. In regard to former defense enterprises now undergoing conversion, they have sought to place renewed controls on access to industry and have attempted to restrict the basic information necessary for decisions by foreign investors. They have expressed concern that outsiders might use their access to derive sensitive information. Even assuming continued will to proceed, defense enterprises face difficult challenges in converting to market-oriented production after decades of privilege, superior status, and consistent claim on national resources. Achieving sustainable economic growth requires that initial privatization be followed by fundamental restructuring of the former state enterprises. In addition to substantial capital investment to upgrade technology and equipment, successful restructuring will require new approaches to marketing and financial management, a consumer orientation and displacement of excess labor. Indeed, substantial unemployment can be expected as enterprises consolidate operations and face the competitive need to improve productivity and profitability. Regional disparities in economic conditions are also likely to increase. Financial instability at the macro level and inadequate legal, regulatory and judicial structures for a decentralized economy are major deterrents. While there are indications of a high savings rate in Russia and thus potential domestic investment resources, much of this capital is being withheld from the market because of high risk and limited legitimate investment opportunities. Capital flight is a major problem. While foreign investors are demonstrating more interest in exploring the Russian market, actual investment levels remain relatively low given the size of the economy. Potential investors are cautious in the face of uncertainties about Russia's political future and its poor credit rating. Corruption and organized crime have emerged as major political and economic concerns. These problems reflect a lack of functioning systems to maintain the rule of law under open and democratic principles as well as the perverse economic incentives created by certain taxes, regulations and policies governing economic activity. Legal enforcement requirements far outstrip available capacity. If not curtailed, crime and corruption could accelerate capital flight, spur growth in illicit traffic in arms, terrorism and narcotics, cause billions of dollars in lost investment, and discredit the concept of the market in significant sectors of Russian society. The breakdown of the central planning system has led to a severe disruption in delivery of social services. Under the old system, the government provided housing, health care, guaranteed employment and pensions. Although often inadequate by Western standards, even these limited free social services have been sharply curtailed as governments at all levels face revenue shortfalls. Meanwhile, statistics reveal serious health problems that have resulted in an unprecedented drop in life expectancy at birth, especially among males. Quality of life is also impaired by the legacy of longstanding disregard for environmental values under the old system. In short, Russia still faces daunting challenges in its quest to become a market-oriented, democratic society. While the full implications of the events in Chechnya are still unclear, at the very least the crisis there demonstrates how quickly things can go awry. Nonetheless, the picture today also is more favorable than many predicted at Russia's birth as an independent country, leaving the nation's leaders -- helped as appropriate by her partners including the United States -- with many opportunities to achieve further tangible progress on political and economic reform. II. U.S. PROGRAM OBJECTIVES A. INTRODUCTION The U.S. assistance strategy has sought to promote Russia's progress toward three key objectives: • A competitive, efficient, market-oriented economy in which the majority of economic resources are privately owned and managed, and economic decisions are based primarily on individual choice. • Transparent and accountable governance, the empowerment of citizens working through civic and economic organizations and democratic political processes to ensure broad-based participation in political and economic life, and respect for human rights, fundamental freedoms and the rule of law. • An enhanced capacity to manage the human dimension of the economic and political transition, to deliver social services in a sustainable fiscal framework and market environment, and to improve the quality of life for all citizens, with particular concern for vulnerable groups. The United States has thus far committed $2.3 billion in economic assistance, including a special $1.6 billion pledge made during the April 1993 Vancouver Summit with President Yeltsin. The U.S. assistance program was conceived as a relatively short-term effort to jump-start reforms in key areas and to enhance as quickly as possible Russia's capacity to sustain the process of economic and political transformation. Results to date support the expectation that the United States and Russia will be able to move rapidly beyond assistance to a relationship based on bilateral trade and investment and the normal kinds of government-to-government programs that are in place with other developed countries. U.S. resources have provided technical expertise and training, professional exchanges, support to private firms to reduce the risks of pioneering trade and investment initiatives, and commodities of U.S. origin. It is now possible to identify tangible results and more sharply define priorities for the remaining period of U.S. assistance. B. PROGRESS TOWARD OBJECTIVES 1. Transition to a Market Economy U.S. advisors to the State Property Committee (known by the Russian initials GKI) played a key role in facilitating the successful mass privatization of major sectors of Russian industry. Following on this success, U.S. assistance has shifted to helping the Russian Privatization Center (RPC) and ten Local Privatization Centers (LPCs) work with newly privatized firms on the difficult process of restructuring. In the financial area, the U.S. is leading a larger international tax reform effort by providing advisors and trainers the Ministry of Finance, the Parliament and the State Tax Service to strengthen fiscal management, revise the tax structure and improve its administration. Small business experts have helped hundreds of new entrepreneurs with technical and business advice, and are transferring their business consulting skills to Russians who will be able to reach many thousand more. In 1994, direct support for trade and investment has received increased emphasis in U.S. assistance. With financial help from FREEDOM Support Act funds and special Congressional appropriations, U.S. trade and investment agencies including OPIC, the Export-Import Bank, the Department of Commerce and the Trade and Development Agency (TDA), have expanded their operations in Russia, offering trade credits, investment financing, support for feasibility studies and a variety of commercial services for U.S. and Russian businesses. Three new U.S. Government-sponsored investment funds--the Russian-American Enterprise Fund, the Fund for Large Enterprises in Russia, and the Defense Enterprise Fund--began providing debt and equity financing to Russian private businesses, including joint ventures with American firms. OPIC assisted U.S. financial intermediaries in establishing three private U.S. investment funds in Russia which will provide project financing on a commercial basis. The U.S. also is funding a Small Business Loan Fund, which is administered by the European Bank for Reconstruction and Development (EBRD), to help entrepreneurs and promote small business growth. American legal and policy advisors have extended critical support to Russian counterparts on the drafting of a civil code and commercial legislation needed for a market economy to function. The Russian parliament approved the first basic elements of the civil code in November 1994, and other key legislation relating to land privatization, financial market regulation and de-monopolization, is under active consideration by legislators. U.S. experts are assisting the development of capital markets and the commercial banking system. We have undertaken a major effort to help Russia establish the institutions and technical systems needed to ensure a transparent and reputable stock market. Current activities are focused on assisting Russia with registration of corporate shares; clearing and settlement of trading transactions; establishment of accounting, disclosure, audit and corporate governance standards; and self-regulation of brokerages. U.S. programs are also providing training for banking supervision by the Central Bank and for improved services to business from commercial banks. The United States is working jointly with the Russian Government through the U.S.-Russia Business Development Committee (a Gore-Chernomyrdin Commission activity) to remove systemic impediments to bilateral trade and investment, and to create needed conditions for expanded commercial ties in a broad range of industry sectors not limited to energy. To help Russia move toward efficient and sustainable use of energy and natural resources, the U.S. has provided policy advice on bringing energy prices to world market levels and incorporating environmental costs into economic decision-making. We have also supported a study on restructuring the electric power industry, identifying future energy supply options to replace unsafe nuclear facilities and developing mechanisms for financing energy investments. U.S.-sponsored pilot projects are demonstrating the potential for improved efficiency in large energy-consuming facilities. Other projects are developing models for pollution abatement in heavily industrialized cities and natural resource commercialization in ways that preserve the environment and biological diversity. In a major Commodity Import Program benefiting U.S. equipment suppliers as well as Russian industry, we have provided financing for the purchase of U.S. energy and environmental technology valued at $85 million. 2. Promoting Democratic Governance and Processes, Human Rights and the Rule of Law American assistance has helped to strengthen Russia's emerging multi-party system by training grassroots party leaders and improving election administration. We are also working to strengthen the institutional capabilities fundamental to a democratic system of non-governmental advocacy groups representing labor, business, women, the disadvantaged, human rights concerns and other causes. U.S. advisors played a key role in spurring the growth of an independent media by training TV, radio and print reporters, and editors as well as business managers responsible for the financial viability and independence of private news outlets. Civil and criminal justice have been strengthened through U.S.-funded programs in judicial training, professional education for attorneys and other practitioners in the justice system, improved access to legal aid for citizens and the reintroduction of the jury trial system. Training for law enforcement officers has also begun. 3. Managing the Human Dimension of Transition In the health sector, the U.S. initiated pilot efforts to demonstrate alternative, cost-efficient methods of financing health care and directing medical resources toward preventive rather than more costly curative care. We have begun a new project to assist Russia in expanding alternatives to the pervasive use of abortion for family planning. We have also undertaken efforts to improve health indicators for women and children, and to rationalize pharmaceutical supply and distribution through joint ventures to manufacture critically needed drugs in Russia. Ten U.S.-Russian medical partnerships have paired dozens of hospitals and other facilities in both countries to foster cooperation in medical practice, research and technology. At least in these facilities, and perhaps beyond them, there are some indications of a more self-reliant, efficient and consumer-oriented health care system. Programs in the highly visible housing sector have achieved significant results. The U.S. has helped to develop successful models for the privatization of urban housing and its management and maintenance, the sale of real estate through market mechanisms, the movement of rent structures toward full cost recovery and the redesign of housing subsidies to target low-income households. A number of localities, including Moscow, have successfully used these models to implement housing reforms. A special housing initiative announced by President Clinton at the Vancouver Summit played a key role in helping Russia and the Baltic states agree on the withdrawal of Russian forces in 1994. Under this initiative, the U.S. has begun providing 5,000 demobilized Russian military officers previously stationed in the Baltics and other neighboring countries with housing in several Russian cities. Although designed to achieve a broader strategic objective important for regional peace and harmony, the officer housing initiative complements other housing reform programs by stressing the importance of private home ownership and market-based transactions. B. STRATEGIC ISSUES AND IMPLEMENTATION EXPERIENCE In a country of Russia's vast size and complexity, the impact of any foreign assistance program will by its nature be limited in scope and impact. Whether Russia succeeds in bringing about lasting democratic and market reforms will depend primarily on its own commitment to reform as well as on its own human and financial resources. In view of the limited funds available for U.S. assistance and the relatively short duration of the aid programs, we have sought to focus our efforts on a few areas in which the U.S. can effectively promote systemic reform and achieve results in the near term. Current plans call for ending new funding for technical assistance in 1998. By that time, Russia will have absorbed the technical assistance we have to offer, and normal trade and investment can then form the basis of the economic relationship. Across our assistance portfolio, we have designed a strategy to promote systemic change in two complementary ways: • Working closely with Russian reformers to develop national laws, policies and institutions necessary for the functioning of a democracy and a market-based economy; and • Developing and demonstrating models of successful solutions to specific problems at the local or enterprise level, for replication and adaptation more broadly. To conserve resources and maximize impact, we have designed programs to achieve synergy and, wherever possible, to perform "double duty." For example: * Exchanges and training programs stimulate ideas for change and establish links between Russian and American professionals. Follow-up technical assistance, networking and, in some cases, help with access to new technologies or financing are then used to reinforce these contacts and translate ideas for change into concrete action. * Similarly, direct support for private sector trade and investment complement technical assistance programs aimed at eliminating market barriers and improving the business environment for private enterprise. The prospect of profit-making business ventures stimulates the demand for reform while, at the same time, a more market-oriented business environment made possible through legal, regulatory and policy changes encourages private sector business activity. Some areas of reform (e.g., land privatization) are of great importance for overall progress but are also highly controversial in Russian domestic politics. Recognizing the limited role that foreign assistance can play in resolving sensitive political issues, we have sought to focus on technical problem-solving in a localized setting where officials are receptive to experimentation and change. These grass-roots "model-building" activities are designed to have significant demonstration effects and provide Russians with a broader range of options as they consider overall solutions. A focus on local-level approaches also responds to the significant devolution of authority and responsibility from the central government to the oblasts and municipalities now occurring across Russia. Local governments lack the resources, management skills and know-how to carry out many of these functions effectively. We have therefore designed a number of assistance programs to help oblast and municipal legislatures, judicial institutions and executive bodies develop innovative approaches to problems of local government that accord with democratic and market principles. III. PROGRAM PLAN AND OBJECTIVES THROUGH 1998 The Russian assistance program was significantly "front-loaded" by the commitment of major supplemental funding in fiscal year 1994. Those funds are now being expended on programs that are underway and will be supplemented through annual appropriations at a lower level through fiscal year 1998, the last year of planned obligations. Money generally is obligated only in six month tranches to ensure that it will not be wasted if partners or projects are inadequate to the reform task; hence, during the year there are substantial unobligated funds which provide essential flexibility to support reform as it develops. Moreover, in anticipation of tightening budget constraints, we are planning few new initiatives in Russia in the remaining period for assistance. Ongoing programs will phase out each year as specific objectives are achieved. By the end of the decade technical assistance will have ended, and the use of assistance funds for direct trade and investment support will have declined sharply and possibly been terminated. In light of these constraints, we have sought to establish clear program priorities, funding limits, and targets and benchmarks by which to measure the program's impact. Adding these elements to the assistance strategy is one of the purposes of this update. A. PROGRAM ACTIVITIES AND TARGETS IN THE TRANSITION TO A MARKET ECONOMY U.S. assistance is heavily concentrated in programs aimed at helping Russia complete the transition from a state-controlled economy to a market system based on private property, competition and a dynamic business sector. The success of this transition is essential for laying the foundation for long-term sustainable growth, increased employment and higher living standards in Russia. With the successful privatization of a large segment of Russian industry, attention has turned to helping create a legal and regulatory environment in which private business can thrive and assisting traditional enterprises in restructuring along market lines. Crime and corruption retard and even jeopardize the economic transformation process; establishment of a clear and fair legal and regulatory framework (including taxes) is an important component in preventing these problems, along with the rule of law activities cited in the next session. We have limited assistance to the following areas in which critical needs exist and U.S. support could make a significant contribution. 1. Legal and Regulatory Framework for Private Sector Development Legal and regulatory reform will continue to receive a high priority in U.S. assistance programs because of its importance for creating a hospitable environment for successful market development. Legal advisors will continue to provide technical assistance and training to counterparts in the Office of the President, the Parliament and the Center for Private Law Reform to support the drafting of specific laws and enforcement mechanisms, based on the recently enacted civil code. Activities will focus on areas essential for the development of a strong private sector economy such as real estate sales, securities market regulation, banking supervision, and the restructuring and regulation of electric power and other public utilities. Passage of specific laws in these areas by late 1996 will be the benchmarks of success. 2. Fiscal and Monetary Reform Major new priority efforts will be devoted to assisting Russia reform tax codes and improve tax administration. The current inadequate tax system impedes domestic and foreign investment and encourages tax evasion and economic crime. By limiting tax revenues, it also prevents Russia from managing large, destabilizing budget deficits. Through training and expert advice, U.S. assistance will provide the central government with capabilities to improve revenue and expenditure analysis and tax collection by the State Tax Service. Other support will be aimed at upgrading revenue and expenditure management at the regional and local level where half of revenues are now retained and expenditures incurred under the new system of fiscal federalism. In providing this assistance and through other avenues we coordinate closely with the International Monetary Fund and World Bank to ensure maximum support for and complementarity with their efforts to encourage sound macroeconomic policies. 3. Capital Markets and Banking Recognizing the vital importance of efficient capital markets for investment, the U.S. will continue to give a high priority to helping Russia build the legal and institutional infrastructure needed to permit stock trading and new stock offerings. U.S. technical assistance is focused on support for an independent regulatory body; independent share registries; clearance and settlement organizations; recognized accounting, reporting and auditing standards; and ethical codes for corporate officers and dealer/brokers to protect shareholder rights. Most of these efforts will end in late 1996 by which time the necessary laws and institutions will be substantially in place. While capital market development will receive the highest priority in the financial sector, limited bank training will continue along with assistance to the Central Bank to improve bank supervision and payments clearance. This assistance is coordinated with major World Bank funding for other segments of the banking sector was begun in 1994. 4. Direct Support for Trade and Investment Direct support for individual commercial ventures will receive increased emphasis in recognition of the improving market environment and the importance of moving as rapidly as possible toward a normal economic relationship with Russia. U.S. programs are aimed at promoting trade and investment with American firms in Russia and demonstrating to a broad spectrum of Russian enterprises the benefits of competitive, market-oriented business. In the period ahead, Eximbank, OPIC and the Trade and Development Agency (TDA) will seek to expand trade and investment support beyond the energy and mineral sectors to a more diverse group of industrial and service enterprises, keeping in view both U.S. commercial interests and the goal of promoting broad-based private sector development. The U.S.-financed Russian-American Enterprise Fund and Fund for Large Enterprises in Russia will substantially increase their investments and seek out a diversified portfolio of projects that demonstrate successful private sector investment and leveraging of additional private financing. Support for the enterprise funds is expected to total $340 million for RAEF and $100 million for FLER and to be capitalized as demand requires between 1995 and 2000. 5. Privatization and Post-Privatization Restructuring With the successful conclusion of mass privatization in mid-1994, future privatization assistance will shift to supporting GKI plans for cash sales of the remaining state enterprises and shares of privatized enterprises still in government hands. The Cooperative Threat Reduction Program funds defense conversion demonstration projects to provide encouragement for enterprises in this formerly privileged and massively overbuilt sector of Russian industry. A major new initiative involves support for ten Local Privatization Centers and the central Russian Privatization Center to build expertise in helping privatized firms to restructure and become more efficient. In the process of assisting 16 major enterprises in 1996 and 200 more in 1997, the RPC and LPCs will have gained valuable experience on key aspects of enterprise restructuring, such as management, production, accounting and marketing. Our goal, in addition to restructuring the targeted enterprises, is to train a core of Russian management consultants who can carry out these functions on a commercial basis after U.S. assistance ends. 6. New Business Development New small private businesses are expected to be a major source of new employment in Russia. The U.S. is supporting the creation of multi-purpose business development centers in eight cities to provide training and advisory services to small businesses and work with local governments to create a hospitable environment for private business growth. While drawing initially on expertise of USAID consultants, Peace Corps volunteers and U.S. retired executives, the centers are designed to be operated eventually by trained Russians on a self-financing, fee-for-service basis. This effort is part of a larger, variegated effort which includes support for the Small Business Loan Fund managed by the EBRD, the Business for Russia exchange program for entrepreneurs, the Citizens Democracy Corps and other resources targeted specifically at small and medium business, particularly in the regions. 7. Land Privatization and Agricultural Restructuring Building on the market emerging from substantial land privatization in urban and near-urban areas, U.S. assistance is supporting pilot projects in land market development in four oblasts to demonstrate the effectiveness of appropriate land codes and practices in promoting agribusiness and other land-based investment and generating revenue for local governments. Specific activities include development of a real estate information system to ensure security of tenure, facilitation of the sale of land owned by enterprises, training of real estate professionals, and public education on land markets and security rights. At the national level, development of basic land legislation is expected to continue and will be assisted as opportunities arise. Pilot efforts will also be undertaken in four oblasts to address key obstacles to successful privatization and reorganization of state farms, as well as providing opportunity for private agriculture. Experience gained from these efforts will help the Russian government to make changes rationally based on observed results. 8. Promotion of Efficient, Sustainable Natural Resource Use Energy assistance is focused on helping Russia develop options for restructuring the electric power industry on a market-oriented basis and for promoting private investment in modern power generation facilities. Work began in 1994 on assessing alternative restructuring options and legal arrangements. This power sector work is closely coordinated with the World Bank’s efforts to develop a power sector lending program for Russia, and with the G-7 efforts to develop viable alternatives to high-risk nuclear plants. Adoption of legislation to implement these changes must be accompanied by difficult decisions on such key issues as raising energy prices in order to make a restructured power sector economically viable. To date rate increases have been modest. Smaller-scale efforts are continuing to help Russia improve demand-side efficiency. U.S. energy assistance programs are expected to end in 1998. In the environment sector, U.S. assistance focuses on policy analysis and reform; planning, management and investment; pollution prevention; conservation and biodiversity; and public participation in environmental decision-making. The assistance emphasizes win-win situations that are economically beneficial and also reduce risks to human health and the environment. This is accomplished through six regional pilot projects that counter severe health risks from industrial pollution, reduce urban pollution, and manage natural resources such as the Lake Baikal watershed and the Russian Far Eastern forests. These pilot projects are supported at the national level through two resident environmental and economic policy advisors and at the local level through a small grants program to Russian environmental non-governmental organizations. Funding will end in 1997. B. PROGRAM ACTIVITIES AND TARGETS IN STRENGTHENING DEMOCRATIC SYSTEMS Market reforms alone are no guarantee that the authoritarian abuses of the past will not reemerge in Russia. We have therefore sought to target substantial resources at helping to build and strengthen democratic institutions as well. In promoting democratic reform, our assistance strategy recognizes the profound historical differences between the United States and Russia and seeks to encourage democracy recognizing that it will have a distinctly Russian face. U.S. advisors are working with their Russian counterparts to strengthen basic democratic values in five key areas. 1. Strengthening Democratic Political Processes As Russia embarks on the important task of solidifying its new democratic experience through a second round of parliamentary elections in late 1995 and presidential elections in mid-1996, the U.S. will support those efforts by continuing to strengthen a wide spectrum of democratically oriented political parties and organizations, as well as the election process itself. Since election administration skills appear already to have advanced significantly, long-term technical support to the Central Election Commission will end in 1995. However, short-term assistance aimed at specific election-related problems will be provided as needed through 1996. Political party development and support to advocacy groups such as labor unions will focus on building skills in grassroots organizing, coalition-building and public education around key issues. The level of effort in this area will be kept flexible to respond to needs that may emerge as the elections approach. Any assistance beyond 1996 will be determined by evaluation of results and needs at that time. 2. Developing Independent Media Efforts will continue to broaden citizens' access to news, information and opinion supplied by fully independent, financially viable organizations in both the electronic and print media across Russia. Building on work already accomplished in television news, U.S. experts will expand their focus to include the written press, wire services and production houses. Journalism education support will continue as will assistance on media advertising and financial management to help ensure freedom from state control. Recently initiated partnerships between U.S. and Russian media organizations will enhance the training and technical assistance provided in this area. Funding is expected to be completed in 1996, with activities ending in 1997. 3. The Rule of Law Responsible, accountable governance and the rule of law result from laws and institutions that protect citizens' rights and freedoms while maintaining law and order. Russia has already moved far to replace autocratic controls with these democratic forms, but further effort is required, especially given the challenges of crime and corruption. The U.S. will continue to strengthen judicial institutions through education and training of judges, prosecutors and other legal practitioners, and through expanded demonstration of the jury trial system. Among the institutions to be supported will be the Constitutional Court (which has yet to become fully functional), the Ombudsman, and the Procuracy, an agency that serves as a watchdog over government activities and shows promise as an effective tool for combating corruption. Legal drafting assistance in criminal and civil law will also continue to be provided. Support for legislative bodies will include development of a legislative research entity in the Duma and Federation Council at the federal level, and possible assistance to regional legislatures will be considered as opportunities arise. Cooperation between U.S. and Russian law enforcement agencies will focus on combating organized crime, traffic in illicit arms and drugs, and other crimes with international implications. Training, expert assistance and cooperation on mutual problems are now under way. The history of Russian police organizations requires care in how we help, but the threat of crime requires that we provide carefully targeted assistance to help Russian police develop the capability to combat crime in ways appropriate for a democracy and civil society. 4. Local and Regional Government An essential element in Russia’s evolution from a totally centralized Soviet system to a decentralized democratic political system appropriate for a market economy is to strengthen the local and regional governments. In practice, this means enhancing their ability to balance the central government, and that of their legislative and judicial branches to balance the traditionally stronger executives. In such a large country, of course, our efforts largely consist of pilot and demonstration projects which help develop models which may be appropriate throughout the country. Some of these are specifically targeted on strengthening local government, such as the municipal finance and management program to help local governments to better analyze and project budget revenues and expenditures. But most also are designed to address specific economic transition roadblocks such as land ownership, or social safety net issues such as privatizing housing ownership. 5. Strengthening Non-Governmental Organizations Citizen participation in public policy debate and community life is a key element of any democracy, and the emergence of a large number of non-governmental organizations (NGOs) in Russia indicates progress in developing a democratic civil society. Ongoing support to such groups will include a program of micro-grants to local NGOs as well as training for NGO leaders on organizational development and operations and the conduct of advocacy, outreach and fund-raising campaigns, through regional centers where NGOs can come together. A limited number of "linkage grants" will support partnerships between American and Russian NGOs. Our goal is to encourage the growth of diverse advocacy groups that provide models of effective grassroots organization and financial self-sufficiency. Phaseout of program activities is planned for 1998. C. PROGRAM ACTIVITIES AND TARGETS IN MANAGING THE HUMAN DIMENSION OF TRANSITION Russia's success in managing the human dimensions of political and economic change will have a major impact on the viability of democratic and market reforms. If the perception that reforms benefit the privileged few and adversely affect the common people's economic and social welfare is allowed to grow unchecked, democratic and market institutions will face increasing danger from political backlash. U.S. assistance, therefore, has also included efforts to demonstrate that the give and take of democracy and market economic systems are compatible with improved delivery of social services and the problems associated with vulnerable populations groups. 1. Building Sustainable Systems for Social Service Delivery For millions of Russians, access to affordable housing, health care and other social services has deteriorated, and the threat of unemployment or underemployment has increased. U.S. assistance has focused on two key social services, housing and health care, because they are important for political and humanitarian reasons and have a substantial impact on government budgets. The U.S. has no specific program that deals directly with unemployment because we have focused instead on creating jobs through activities that facilitate private sector development through a better market environment: this is the only way to replace the jobs lost through enterprise restructuring. Housing sector reform activities are well underway and will continue until 1997. Current efforts are focused on replicating models successfully developed under U.S. assistance programs for privatizing housing and financing new construction. On privatization, U.S. programs will continue to support development of the legal framework for condominium ownership of urban apartment buildings. Our goal is to replicate the pilot condominium associations in up to 100 cities by 1997. For municipally owned housing, the program to privatize building management and maintenance will be expanded to cover 40 percent of Moscow units and 25 percent of those in Yekaterinburg and Novosibirsk. A system for mortgage finance for new housing, which will be important when inflation ebbs, is already being tested in several commercial banks. We are coordinating this activity with World Bank plans to support a larger mortgage financing project in the near future. The U.S. is also helping Russia to refine draft legislation on a basic land code and related implementing laws. Our assistance is geared to making passage of the legislation possible by 1996 so that the foundation for private real estate property rights will be firmly established. Training of real estate professionals will also continue. By 1997 when U.S. assistance ends, it is expected that Russia will have tested and replicated successful models of a private residential real estate market. U.S. programs on health care finance and service delivery reform respond to Russian legislation establishing a national health insurance system and devolving responsibility for health care to local governments. The U.S. is supporting pilot efforts on health care financing and service delivery in four oblasts to serve as models for other regions, as well as development of national legislation. Key elements that aim at a fundamental reorientation of Russian health care delivery include greater focus on preventive care, consumer choice of physicians, improved health administration, and national legal reforms to support private practitioners, pharmaceutical manufacturers and insurance providers. Continued support for a limited number of hospital partnerships will help Russian medical personnel gain experience with modern administration and treatment methods. Limited support will be provided for health surveillance and capacity-building in health PVO’s. Funding will phase out as these objectives are met in the next 1-2 years. 2. Addressing the Special Problems of Vulnerable Groups Several cities, including Moscow, are committed to increasing rents on public housing over a five-year period to cover full maintenance costs. These costs have historically consumed up to 40 percent of municipal budgets. While economically sound, this policy requires a safety net for households on low incomes, such as the unemployed or those depending on fixed pensions. With U.S. assistance, Moscow and selected other cities are now introducing a system of means-tested housing allowances for low-income households. Our goal is to help housing authorities throughout most of Russia introduce means-tested housing allowances and raise rents to cover 80 percent of housing costs by 1998, while targeting existing subsidies to low-income households. Addressing the special problems of another group, the U.S. is supporting efforts to decrease the high rates of maternal mortality and morbidity in Russia -- rates five to ten times higher than in other industrialized countries, resulting in part from the continued effects of the Soviet era’s widespread use of abortion as the primary form of birth control for Russian women. This program will employ public education and provide training programs to increase women’s knowledge of and access to modern contraceptives. Dialogues with policy makers will build long term support for reproductive health programs. Linkages will be developed among Russian institutions that will support the continuation of programs after USAID funding ceases. Funded over three years, the program will be completed in 1998. V. CONCLUSION -- IMPLICATIONS FOR LONG-TERM U.S. INTERESTS The United States is engaged in an unprecedented effort to help bring about the peaceful transformation of a country dominated for nearly seven decades by forces hostile to democratic and market institutions. While Russia has experienced remarkable economic and political changes in the relatively short period since the fall of communism, it is still too early to know whether democratic and market reforms are irreversible. U.S. assistance has provided support to Russia at a critical time in its reform process. While some results can already be seen, the full impact of our programs may not be known for years to come. Much of U.S. assistance involves exposing Russians of all walks of life to new ideas and providing new tools for addressing national problems in a democratic and market-driven context. In many respects, assistance to Russia remains a high-risk venture for the U.S. taxpayer. But it also offers potentially enormous returns in much the same way that the Marshall Plan helped to promote U.S. interests after World War II by creating strong allies and economic partners among former enemies in Europe and Japan.