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 Russias future course, and thus delays the 
growth of investor confidence. There was good news in 1994s 
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 Banks 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 Russias 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 PVOs. 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 eras 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 womens 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.