Order Code IB95077
CRS Issue Brief for Congress
Received through the CRS Web
The Former Soviet Union and
U.S. Foreign Assistance
Updated June 15, 2000
Curt Tarnoff
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

---

CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
Snapshot of U.S. Assistance to the Former Soviet Union
Levels of Assistance
Grant Assistance
Credit Assistance
Direction of Assistance
Programs and Projects
Status of U.S. Assistance to the Former Soviet Union
Developments in 1999
Administration FY2000 Request
Emergency Supplemental Appropriations
FY2000 Appropriations
Cooperative Threat Reduction
Developments in 2000
Administration FY2001 Request
FSU Aid Debate in the Senate
Issues for Congress in 1999
Aid to Russia
Funding Levels
Conditionality
Bank of New York Scandal
Aid to the Other Republics
Ukraine
Central Asia
The Caucasus
LEGISLATION

---

IB95077
06-15-00
The Former Soviet Union and
U.S. Foreign Assistance
SUMMARY
Seeking to encourage a transition to
Union account at $830 million, little change
democracy and free market economics in the
over the FY2000 level of $835.8 million. On
states of the former Soviet Union, the United
May 9, the Senate Appropriations Committee
States, since December 1991, has offered
reported S. 2522, the FY2001 Foreign Opera-
roughly $7.3 billion in grants for economic and
tions Appropriations, providing $775 million
technical assistance to the region. Most of the
for the FSU.
grant assistance has been provided through the
Agency for International Development
Whether, how much, under what condi-
(USAID). In addition, $4.3 billion has been
tions, and to whom in the successor entities of
provided in food aid through the Department
the Soviet Union assistance might be given
of Agriculture, and $2.3 billion by the Depart-
remain matters of ongoing debate in Congress.
ment of Defense for nonproliferation purposes.
The United States has also subsidized guaran-
For more information on this issue, see
tees for more than $12 billion in credits from
CRS Report RL30112, Russia’s Economic
the Export-Import Bank, Overseas Private
and Political Transition: U.S. Assistance and
Investment Corporation, and the Department
Issues for Congress, CRS Issue Brief
of Agriculture.
IB98038, Nuclear Weapons in Russia, and
CRS Report 97-1027, Nunn-Lugar Coopera-
In its FY2001 budget request, the Admin-
tive Threat Reduction Programs: Issues for
istration proposed funding the former Soviet
Congress.
Congressional Research Service ˜ The Library of Congress

---

IB95077
06-15-00
MOST RECENT DEVELOPMENTS
On June 15, Senator Helms announced he would seek to block a May 26 agreement to
reschedule $485 million in Russian debt. If the debt is not rescheduled, Russia would have
to repay $155 million of its World War II-era debt by July 1 or face loss of most-favored-
nation status. In addition, several new pieces of legislation have been introduced in both
House and Senate that condition aid and debt relief to Russia. See Aid to Russia-
Conditionality section below.
On May 9, 2000, the Senate Appropriations Committee reported S. 2522 (S.Rept. 106-
291), the FY2001 Foreign Operations Appropriations, providing $775 million for the FSU,
$55 million and 7% less than the Administration request. The full Senate is currently
expected to take up the measure during the week of June 19. The House Foreign Operations
Subcommittee is expected to mark-up its version of the bill on June 20.
BACKGROUND AND ANALYSIS
Seeking to facilitate the transition of the states of the former Soviet Union (FSU, also
known as the NIS, New Independent States) to democracy and free market economies, the
United States launched a program of economic assistance to the region in late 1991. The
FREEDOM Support Act, approved by Congress in October 1992, authorized this program
(P.L. 102-511) and provided the policy guidelines under which assistance would be allocated.
A broader program of assistance has existed concurrently that encompasses many spigots —
including export credit programs, food aid, and the Nunn-Lugar cooperative threat reduction
effort in the four nuclear weapons states of the region. (For details on the latter issue, see
CRS Issue Brief IB98038, Nuclear Weapons in Russia, and CRS Report 97-1027,
Nunn-Lugar Cooperative Threat Reduction Programs: Issues for Congress.) While this issue
brief describes trends and issues in the broad program of assistance, it concentrates on the
bilateral economic aid program that has been both the main U.S. instrument for influencing
the economic and political transition in the FSU and a chief focus of congressional attention.
For more details on the economic assistance program see CRS Report RL30112, Russia’s
Economic and Political Transition: U.S. Assistance and Issues for Congress (May 1999).
Snapshot of U.S. Assistance to the Former Soviet Union
Levels of Assistance
Grant Assistance. Since 1992, roughly $7.3 billion in grant economic assistance has
been appropriated by Congress to run U.S. programs in the former Soviet Union. The
vehicle for this assistance is the Assistance for the Independent States of the Former Soviet
Union account (formerly known as the NIS, New Independent States, account; and also
called FSU account in this issue brief), funded annually by the foreign operations
appropriations bill. According to the State Department, as of the end of September 1999,
$6.5 billion had been obligated by the Agency for International Development (USAID), the
main implementor of the program, or transferred by it to other agencies for their programs
CRS-1

---

IB95077
06-15-00
in the region ($782 million in FY1999 alone). The FY2000 FSU account appropriation of
$835.8 million represents about 5.5% of total U.S. worldwide foreign aid for that year.
Table 1. FSU Account Appropriations
(millions of $)
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
Total
230a
417
2,158b
818c
641
625
770
847
836d
7,342
a. Economic Support Funds reprogrammed for FSU in early 1992.
b. Includes $1.6 billion FY1993 supplemental approved September 1993. P.L. 103-211 rescinded $55 million
of the FY1994 and FY1993 supplemental appropriations for the FSU.
c. Original appropriation was $850 million. P.L. 104-6 rescinded $7.5 million. P.L. 104-19 rescinded $25
million.
d. Original appropriation was $839 million. P.L. 106-113 rescinded .38%.
In addition to the FSU account economic assistance, other spigots of grant aid have
targeted the region. Under the Department of Defense annual appropriations, the Nunn-
Lugar Cooperative Threat Reduction Program — totalling $2.1 billion in obligations to the
end of FY1999 ($272 million in FY1999 alone) — is a defense program aimed chiefly at
assisting the denuclearization of Russia, Kazakhstan, Belarus, and Ukraine, where nuclear
weapons were located when the Soviet Union fell. With obligations totalling $793 million
($243 million in FY1999 alone), the Department of Energy conducts a range of programs to
support the safety of nuclear reactors and the protection and control of fissile materials and
stockpiles. Under the U.S. Department of Agriculture appropriations bill, grant or subsidized
food aid, mostly for humanitarian purposes, is funded — equaling $4.3 billion in cumulative
obligations ($1.3 billion in FY1999
alone). Additionally, a number of other
FSU Account Country Allocations
U.S. government agencies, including the
(in $ millions)
Commerce Department, USIA, and the Country
FY99
FY00
FY01
Peace Corps, have their own disparate
(est)
(req)
programs of exchanges and technical
assistance conducted out of their agency Russia
161.2
178.5
161.9
budgets and not drawing on the FSU Ukraine
203.6
160.0
171.3
account. Obligations of all U.S. grant Belarus
12.4
7.3
8.0
assistance from all spigots, including the Moldova
45.4
64.3
50.0
FSU account, to the end of FY1999
equal $14.5 billion ($2.3 billion in Armenia
80.1
102.4
75.0
FY1999 alone).
Azerbaijan
35.2
30.8
54.6
Georgia
84.6
108.4
85.8
Credit Assistance. In addition to Kazakhstan
50.5
43.7
48.3
grant assistance, the United States has
made guarantees or loans to support the Kyrgyzstan
32.0
29.5
37.5
equivalent of $12.6 billion in U.S. Tajikistan
13.1
9.2
12.0
exports of manufactured and agricultural Turkmenistan
11.3
6.3
8.0
products and business investments in the
Uzbekistan
27.3
17.4
25.0
FSU since 1992. The actual budget
outlays for these programs are as little as Regional
90.5
78.2
92.8
one-fifth of these amounts, since only the Total App.
847.0
835.8
830.0
subsidy cost has to be appropriated to
CRS-2

---

IB95077
06-15-00
back up the loan or guarantee. In the event of a default, however, the U.S. taxpayer would
be liable for the full face value of the loan.
Direction of Assistance. Although in recent years, Russia has accounted for only 15-
20% of FSU account allocations, the bulk of cumulative U.S. assistance since the program
began has gone to Russia. This is a reflection of its importance to U.S. national interests, its
physical expanse and population size, and the relatively advanced state of its reformist policies
compared to the other states of the region. Of cumulative FSU account obligations to the end
of September 1999, Russia represents $2.4 billion, or 38%, followed by Ukraine with $1.4
billion (22%), and Armenia with $604 million (9%).
However, on a per capita basis, suggesting the size and, possibly, impact of the program
in the recipient country, the order changes. Armenia is the chief recipient of cumulative FSU
account obligations, receiving $159 per capita, followed by Georgia ($53), Moldova ($43),
and the Kyrgyz Republic ($39). Russia is seventh, at $17 per person.
Programs and Projects
Most of the FSU account program is in the form of technical assistance and exchanges.
Where there is “cash” involved, it is mostly in equity investments and loans to the private
sector provided by the region’s three enterprise funds. As much as three fourths of the aid
is going to the private sector — not the governments of the FSU. Nearly 98% of those funds
used for programs run by USAID are spent on U.S. goods and services. Although the FSU
account is appropriated directly to USAID, more than one-fourth of the funds has been
funneled to other U.S. government agencies. But the proportion is growing – in FY2000,
more than half will go through other agencies.
Responsibility for the overall strategic direction of the aid program lies in the hands of
the Department of State’s Coordinator of U.S. Assistance to the NIS, currently Ambassador
William B. Taylor, Jr. Generally speaking, in its first years, the aid program emphasized
technical assistance, especially to central governments for policy reforms establishing basic
laws and institutions that allow democracy and free market economy to flourish. By 1997,
in the case of Russia and, to a lesser extent, in other countries, these reforms had begun to
take hold and the Administration began to shift to what it called a more long-term view of
FSU needs and U.S. relations with the region. Its Partnership for Freedom initiative
emphasized assistance targeted more at the grassroots, at local government and the
hinterlands, and at building more cooperative relationships between the FSU and American
people. Hence, on the economic front, there has been a greater amount of funds put into
trade and investment — including, at the national level, efforts to affect tax policy — and
support for small and medium business and for establishing joint ventures with U.S. business.
To further the development of a civil society, there has been greater support for partnerships
between U.S. and FSU non-governmental organizations and U.S.-FSU exchanges.
The FSU account funds programs in a wide variety of sectors, most of which overlap.
Private sector development programs, representing the largest proportion of funds, include
efforts to assist the privatization of state-businesses and efforts to help draft new tax,
securities, and commercial law. The enterprise funds are among several efforts to assist micro
to medium-sized business lending aimed at stimulating the nascent private sector. Numerous
CRS-3

---

IB95077
06-15-00
person-to-person volunteer programs provide technical assistance to individual farmers and
businessmen.
Trade and investment programs include a variety of activities run through OPIC, the
Department of Commerce, the Trade and Development Agency, and the Export-Import Bank
to encourage U.S. investment and exports. Among the democratic initiatives are the
various educational exchanges and traineeships run by USAID and the U.S. Information
Agency (USIA) and technical assistance provided to political parties, the judiciary, and law
enforcement agencies. Efforts to encourage the development of indigenous
non-governmental organizations, such as professional associations and charities, and the
growth of independent media are also being emphasized.
Humanitarian assistance provided under the FREEDOM Support Act funds food and
medical aid for highly vulnerable groups, especially in the Caucasus region. Health care
programs include efforts to combat infectious disease, promote health care reform, assist
family planning, and establish hospital partnerships. Energy and environmental programs
are helping address nuclear reactor safety, seeking through demonstration projects to
encourage energy efficiency, and providing small project grants for local environmental
programs. Finally, housing programs include technical assistance for housing policy reform,
such as establishment of a mortgage lending system.
The FSU account is increasingly being drawn upon for nonproliferation activities,
usually more closely associated with the Nunn-Lugar Cooperative Threat Reduction Program.
Under the so-called Expanded Threat Reduction Initiative, the State Department supports
commercial alternative employment for nuclear and chemical weapons scientists, border
security training, and other efforts to control the proliferation of weapons expertise and
materials.
Status of U.S. Assistance to the Former Soviet Union
In 2000, Congress continues its oversight of the ongoing assistance program for the FSU
while determining the size and shape of the FY2001 program. The section below discusses
the FY2000 appropriations that serves as a backdrop for the debate on the budget for
FY2001. The following section looks at Administration and congressional actions as they
unfold in 2000. For a review of earlier legislative and executive activities, see CRS Report
RL30148, U.S. Assistance to the Soviet Union and its Successor States 1991-1999: A
History of Administration and Congressional Action (revised March 15, 2000).
Developments in 1999
Administration FY2000 Request. On February 1, 1999, the Administration presented
its FY2000 budget request to Congress, proposing $1.032 billion for the FSU account, a 22%
increase over the FY1999 level of $847 million. Of this amount, $241 million was expected
to go for a new Expanded Threat Reduction (ETR) Initiative that would address proliferation
issues arising out of the economic crisis facing Russia and other FSU countries. The ETR
initiative was part of a larger $1.0 billion Administration FY2000 proposal for increasing
amounts dedicated to proliferation issues in the FSU, the remaining funds coming from the
CRS-4

---

IB95077
06-15-00
Department of Defense ($485.5 million) and Department of Energy ($264.7 million). Over
five years, most of the $1.8 billion added by the initiative to amounts previously planned for
non-proliferation activities would go to DOE and DOD. But in the first year, three fourths
of the higher funding level requested would be in State Department programs, mostly funded
under the FSU account.
State Department-managed programs — $49 million in FY1999 — include several
efforts to forestall the proliferation of weapons expertise, i.e. nuclear, chemical, and biological
weapons scientists, who are likely to sell their knowledge to rogue nations unless offered
alternative employment and income opportunities. In addition, the United States works to
strengthen FSU export controls and provides training and equipment to the border guards of
Georgia and other FSU countries to prevent transfer of weapons of mass destruction. The
ETR initiative proposed to lead a new effort to remove the Russian armed forces and
equipment from bases outside Russia and to dispose of ammo dumps vulnerable to theft.
The FY2000 request did not mark a major increase in support for the traditional efforts
to build democracy and free market economies in the FSU that have characterized the
FREEDOM Support Act program. After subtracting the ETR request, traditional activities
were funded at roughly $791 million.
Emergency Supplemental Appropriations. On May 21, the President signed H.R.
1141, the FY1999 Supplemental Appropriations, into law (P.L. 106-31). Although chiefly
providing funds for the Central America hurricane and Kosovo, the legislation also directed
up to $10 million from FY1999 appropriations for Senate operations be used for a Russian
Leadership Program, to be implemented by the Librarian of Congress. It would bring
emerging Russian political leaders to the United States to give them firsthand exposure to the
U.S. free market economic system and democratic institutions.
FY2000 Appropriations. On June 17, 1999, the Senate Appropriations Committee
reported its version of the FY2000 foreign operations bill. S. 1234 (S.Rept. 106-81) would
fund the FSU account at $780 million, 24% less than the Administration request and 8% less
than the FY1999 level. On June 30, the full Senate approved S. 1234 by a vote of 97-2,
leaving the FSU account mark intact. On July 14, the House Foreign Operations
subcommittee marked up its version of the FY2000 appropriations, and the full
Appropriations Committee reported the bill on July 23 (H.Rept. 106-254). H.R. 2606 was
approved by the House on August 3 by a vote of 385 to 35. It provided $725 million for the
bill’s renamed Independent States of the Former Soviet Union account, 30% less than the
Administration request and 14% less than the FY1999 level.
On September 27, 1999, the House-Senate conference issued its report on H.R. 2606
(H.Rept. 106-339), providing $735 million for the Former Soviet Union account, 29% less
than the Administration FY2000 request, and 13% less than the FY1999 level. On October
6, Congress approved the conference report — the House by a vote of 214 to 211, the Senate
by a vote of 51-49. The President vetoed H.R. 2606 on October 18.
On November 5, 1999, the House approved H.R. 3196, a new version of the FY2000
foreign operations appropriations, that provided $839 million for the former Soviet Union,
$104 million more than H.R. 2606. Following House passage of H.R. 3196, further
negotiations between Congress and the White House led to a few additional changes and the
CRS-5

---

IB95077
06-15-00
introduction on November 17 of a third foreign operations appropriation bill, H.R. 3422.
That bill was enacted into law by reference as part of H.R. 3194, the Consolidated
Appropriations Act for FY2000 (P.L. 106-113, signed into law on November 29) that was
approved by the House on November 18 (296-135) and by the Senate on November 19 (74-
24).
After subtracting an across-the-board .38% rescission mandated by the Consolidated
Appropriations Act, H.R. 3422 provides $835.8 million (originally $839 million) for the
former Soviet Union, 19% less than the Administration FY2000 request but only 1% less than
the FY1999 level. The act earmarks 12.9 % of the account for Georgia ($107.8 million) and
12.2% for Armenia ($102 million). Unlike previous years, it only recommends that $180
million “should” be made available for Ukraine, a soft earmark instead of a hard one. The act
caps assistance to any one country at 25% of the total account ($209 million), with the
exception of nonproliferation activities.
H.R. 3422 also requires that $20 million be for programs in the Russia Far East and that
$14.7 million be made available for maternal and neo-natal health activities, of which 60%
should be made available in Russia. The act provides $10 million for the Russian Leadership
Program, which was originally funded from the Senate operations budget when it was
established in the May 1999 supplemental. The program, administered by the Library of
Congress, brings promising Russian leaders to the United States to expose them to American
democracy.
Although H.R. 3422 leaves funding allocations for the Expanded Threat Reduction
Program up to the Administration, the recommended account funding level and country
earmarks effectively prevent aid from increasing to the levels proposed by the Administration
to permit full implementation of the Expanded Threat Reduction Program. The
Administration has since allocated $175 million of the appropriation to the Program, $66
million less than the Administration request.
As in FY1999, the FY2000 act withholds half of aid to the government of Russia until
the President determines that the government of Russia has terminated any arrangements to
provide Iran with technical and other assistance to develop a nuclear reactor or ballistic
missile capability. Unlike previous years, however, the provision only affects the government
of the Russian Federation, not aid to local and regional governments. Further, it exempts
nonproliferation and child survival activities, and efforts to combat infectious diseases. The
act contains a new condition, requiring that no aid to the central government of Russia be
provided until the Secretary of State certifies that Russian armed forces have not established
a separate sector in Kosovo and are operating under NATO command. As in previous years,
aid is also prohibited to the government of the Russian Federation if it implements a law
discriminating against religious minorities.
H.R. 3422 also recommends that, of funds allocated to the Caucasus, 15% should be
used for measures to further a peaceful resolution of the regional conflicts there. Section 907
restrictions on aid to Azerbaijan are lifted for democracy, humanitarian, nonproliferation,
TDA, Foreign Commercial Service, OPIC, and Export-Import Bank assistance. H.R. 3422
also contains the Silk Road Strategy Act that, adding a new chapter to the Foreign Assistance
Act of 1961, authorizes assistance and lays out congressional priorities with specific regard
to the countries of Central Asia and the Caucasus.
CRS-6

---

IB95077
06-15-00
Cooperative Threat Reduction. For FY2000 CTR programs, the Administration
requested $475.5 million. Congress authorized that amount in the National Defense
Authorization Act for FY2000 (S. 1059, P.L. 106-65) and appropriated $460.5 million in the
Department of Defense appropriations (H.R. 2561, P.L. 106-79).
Developments in 2000
Administration FY2001 Request. On February 7, 2000, the Administration proposed
its budget for FY2001, including $830 million for the “Assistance for the Independent States
of the former Soviet Union” account, less than 1% below the FY2000 appropriation. Of the
total, $87 million is expected to go for Expanded Threat Reduction activities. An additional
$45 million in ETR-related science center funding, previously provided in the FSU account,
is requested under the nonproliferation account.
FSU Aid Debate in the Senate. On May 9, 2000, the Senate Appropriations
Committee reported S. 2522, the FY2001 Foreign Operations Appropriations. It would
provide $775 million for the FSU, $55 million, or 7%, less than the Administration request.
As has been the case for many years, the Senate bill contains numerous country and
project earmarks. It would provide at least $175 million for Ukraine, of which $25 million
is for nuclear reactor safety, $1 million for the University of Southern Alabama to study
environmental causes of birth defects, and $5 million for the Ukrainian Land and Resources
Management Center. It provides $94 million for Georgia, of which $25 million is for the
Border Security Guard, and $5 million is for development and training of municipal officials
in water resource management, transportation, and agri-business. The bill also would provide
$89 million for Armenia and require that at least $6 million of $12 million earmarked for
Mongolia must come from the FSU account. In all, mandatory earmarks for these four
countries total $364 million, 47% of the account, leaving little more than half for Russia and
eight other FSU countries.
The bill does not earmark a total for Russia, but it does require that $20 million be spent
for programs in the Russia Far East, $400,000 be used for the Cochran Fellowship Program
that provides agricultural exchanges, $250,000 be used to support the Moscow School of
Political Studies, and $10 million for non-governmental organization humanitarian relief
programs in Chechnya and Ingushetia.
S. 2522 places several conditions on aid to Russia. As in the FY2000 bill, it withholds
half of funds planned for programs assisting the central government of Russia until the
President determines that the transfer to Iran of nuclear reactor or ballistic missile expertise
and equipment has been terminated. Nonproliferation and infectious disease aid are exempted
from this restriction. The bill also repeats language that prohibits aid to the central
government of Russia if it implements a law discriminating against religious minorities. S.
2522 contains a new condition, prohibiting aid to the central government of Russia until the
Secretary of State determines that Russia is cooperating with international investigations of
war crime allegations in Chechnya and that Russia is providing full access to NGOs providing
humanitarian aid to refugees in Chechnya.
S. 2522 repeats FY2000 language exempting democracy, humanitarian, nonproliferation,
Foreign Commercial Service, Trade and Development Agency, Overseas Private Investment
CRS-7

---

IB95077
06-15-00
Corporation, and Export-Import Bank assistance from the Section 907 (of the FREEDOM
Support Act) prohibition on aid to Azerbaijan.
Issues for Congress in 1999
Foreign aid is an instrument of U.S. foreign policy, and U.S. relations and interests in
the former Soviet Union determine levels, direction, and types of aid funding. While there
has been opposition, support for the FSU account economic aid program has generally been
bipartisan and strongly supported by congressional leaders. A decline in program funding
from FY1994 to FY1997 reflected a downward trend in the foreign aid program overall,
criticisms of program implementation and of Russian behavior, and, some would say, the
Administration’s failure to make a case for higher levels of funding. In 1997, the
Administration attempted to reinvigorate the program and its funding with its Partnership for
Freedom initiative. As a result, the appropriation was 23% higher in FY1998 than the
previous year, and has stabilized at a level roughly 10% higher than that in the two years
since. The FY2001 request marks little change from the FY1999 level.
Since its inception, the economic aid program — united by the coherent and singular
purpose of democratization and free market reform — has always treated Russia as a case
distinct from the other NIS countries. Increasingly, through earmarks and their differentiated
development, the program is treating the region as four distinct entities — Russia, Ukraine,
the Caucasus, and Central Asia — which all compete for the same pool of funds.
Aid to Russia
Funding Levels. Even after the demise of the Soviet Union, Russia has remained a
significant interest of U.S. foreign policy and a major focus of the foreign aid program.
Reflecting the highs and lows of U.S. interest and goodwill, Russia was the main beneficiary
of the assistance program in its first years, but has borne the brunt of FSU account cuts more
recently. Funding for Russia declined from roughly 60% of the FSU total during the first two
years to about 40% of FY1995 funds, 21% of FY1996 funds, and 15% of FY1997 funds. It
has remained under 20% of the total account since then. The Administration has allocated
$178.5 million to Russia from FY2000 appropriations, $61 million of which for the non-
traditional ETR program, and it has requested a level of $162 million for Russia programs in
FY2001. This funding decrease has led many to question whether available funding for
Russia is adequate to meet both short- and long-term U.S. foreign policy objectives in that
country.
There are a number of reasons for the long-term decline in Russia aid. Some argued
that U.S. foreign policy had become too dependent on Russian President Yeltsin and that
more funds should be funneled to other countries in the region. Others have criticized
Russian domestic and international behavior and either sought cuts in aid or sought to use the
aid program as leverage to change Russian behavior. These conditions are discussed below.

Supporters of a larger aid program for Russia have argued the importance to U.S.
foreign policy and defense interests of a democratic and free market Russia. They have
contended that it is less expensive to assist a more cooperative Russia than it was to defend
CRS-8

---

IB95077
06-15-00
the United States from threatened Soviet aggression during the Cold War and any future
threat the country might pose if it reverts to totalitarian rule. Finally, they have pointed out
that aid is intended to be used to change Russia to a form of government and economy we
would prefer, and that most aid goes to grassroots businesses and NGOs — not the central
government — for the purpose of building long term cooperation and friendship with a people
long isolated from the West.
Conditionality. As noted above, linked to the criticisms of Russia is the issue of
conditionality. Both the FREEDOM Support Act and annual foreign operations
appropriations bills contain general and specific conditions that all the states of the FSU are
expected to meet in order to receive assistance. Conditions left to the broad discretion of the
President include whether these countries are undertaking economic and political reform,
whether they are following international standards of human rights, whether they are adhering
to international treaties, and whether they are denying support to terrorists.
Other conditions established by Congress are more firm and specific, and the majority
of these to date have been aimed at the Russian government. The FY1995 foreign operations
bill would have prohibited assistance to Russia if agreement on a timetable for Russian troop
withdrawal from the Baltics had not been achieved or was not being carried out. Under
prodding by the Administration, Russia withdrew its troops in August 1994. In 1995, Russia
increasingly became the focus of efforts to impose specific conditionality. Early in that year,
Russia’s behavior in Chechnya was mentioned by congressional critics as a potential condition
and was one reason given for acceptance of rescissions directed specifically at Russia.
Later in the year, the issue of the sale of nuclear power plants to Iran was first raised.
In both the FY1996 and FY1997 appropriations, aid was prohibited unless the President
assured that Moscow had terminated its plans for the sale. In both years, however, the
President was allowed to waive this restriction if he deemed it in the interest of U.S. national
security. The FY1998 bill subjected half of aid allocated specifically for the government of
Russia to the requirement of a presidential determination, but allowed a waiver. It did not
affect aid to the private sector. In FY1998, the President did not make the necessary
determination and half of aid allocated to the government of Russia — local and regional as
well as central government — was cut.
As increasing amounts of assistance have been targeted in recent years on the local level
and the expansion of trade and investment, the condition, as then worded, threatened to
frustrate the U.S. aid strategy, because local and regional governments play a significant role
in facilitating the growth of business through legislation and other support. It also affected
such programs as the hospital partnerships, family planning, and exchanges because most
hospitals, clinics, and universities are government-operated. Although the final version of the
FY1999 appropriations repeated the same Iran language as in the FY1998 bill, the conferees
statement exempted aid to partnerships with universities, hospitals and environmental
institutions. Aid to local and regional governments was still affected. The FY2000
appropriation bill, however, prohibits half of aid, specifically to the central government of
Russia alone if the Iran transfers continue. S. 2522, the FY2001 foreign operations bill,
would continue that restriction.
The Administration and others state that the reactors could be used by Iran to help
develop nuclear weapons. The economically strapped Russians argue that they would be hard
CRS-9

---

IB95077
06-15-00
pressed to give up what might well become more than a $3 billion deal and point out that the
reactor is the same type as the United States is supporting in North Korea. See CRS Report
RL30551, Iran: Arms and Technology Acquisition for further details.
Another major restriction on aid to Russia has been approved in the FY1998, FY1999,
and, again, in the FY2000 appropriations. This prohibits any aid to the government of the
Russian Federation (i.e. central government; it does not affect local and regional
governments) if the President does not certify that Russia has not implemented a law
discriminating against religious minorities. The President has made such a determination each
year, most recently on May 26, 2000. S. 2522 would continue this restriction.
With the renewed war in Chechnya in 1999, commentators and members of Congress,
including Senator John McCain, argued that a cut-off of aid would be an appropriate
expression of U.S. disapproval. Many of these critics targeted aid provided by the IMF or
the Export-Import Bank, and specifically exempted U.S. nonproliferation or democracy
assistance. S. 2522 would prohibit aid to the central government of Russia if it is not
cooperating with international investigations of war crime allegations in Chechnya or
providing access to NGOs doing humanitarian work in Chechnya.
In response to previous congressional efforts to impose conditions on Russian aid, the
Administration has repeatedly argued that it is inappropriate to condition aid to Russia on a
particular desired behavior such as regarding Iran or Chechnya inasmuch as the program is
intended to benefit reformist elements in Russia and ultimately facilitate a transformation that
might ensure a more cooperative relationship in future. For example, according to the
Administration, less than a quarter of U.S. funds in 1998 were going to assist the Russian
central government directly, and that aid was for efforts to reform taxation, banking, financial
markets, and other economic laws. The level of aid to the central government has likely
diminished since then.
However, the second Chechnya war has caused the Administration to take a harder line,
at least with respect to aid provided by international financial institutions. The IMF’s
continuing delay of a $640 million loan installment suspended since September 1999 has been
attributed by many observers, not to Russia’s failure to enact economic reforms as cited by
the IMF, but to pressure from Europe and the United States in reaction to Chechnya.
Secretary Albright’s December 1999 veto of a $500 million Export-Import Bank loan, due
to accusations of unfair business practices of the oil company loan recipient, may also have
been influenced by the Chechnya situation. On March 31, 2000, she lifted her objection to
the loan.
In the spring of 2000, Members of Congress have proposed a number of other
conditions, which may be debated on the House or Senate floor in the near future. These
would:
! require a reduction in assistance to Russia by an amount equal to any loan or
other financial assistance or energy sales provided to Serbia. Authored in
response to Russia’s hosting of the Yugoslav Defense Minister, an indicted
war criminal, and its provision of a loan to Serbia, Senator Helms plans to
offer the condition as an amendment to S. 2522.
CRS-10

---

IB95077
06-15-00
! prohibit the rescheduling or forgiveness of any bilateral debt owed to the
United States by Russia until the President certifies that Russia has ceased
operations and closed its intelligence facility at Lourdes, Cuba. H.R. 4118
(Ros-Lehtinen) was approved by the House International Relations
Committee on May 4. The Committee added presidential waiver authority.
! prohibit rescheduling or forgiveness of bilateral debt until Russia has
terminated all sales and transfers of Moskit anti-ship missiles. H.R. 4022
(Rohrabacher) was approved by the House International Relations
Committee on April 13 with a presidential waiver authority provision. On
June 7, the non-waiver version was introduced in the Senate by Senator
Smith (S. 2687).
In addition to the above, another step has recently been taken to thwart rescheduling of
Russian debt. On May 26, as required by law thirty days prior to its taking effect, the
Administration submitted to Congress a report on a bilateral agreement with Russia to
reschedule its 1999 and 2000 repayments of Soviet-era debt. While Paris Club creditors have
been adverse to total forgiveness, they have favored rescheduling due to the burden the debt
places on Russian efforts to reform its economy. This agreement, however, was challenged
by Senator Helms on June 15, and its standing is uncertain at this time. What makes this
move particularly significant is that, of the roughly $485 million of U.S. debt that would be
rescheduled, $155 million is part of its Lend Lease debt, held from World War II. A
provision of the Trade Act of 1974 requires that arrears in this debt be punished by loss of
MFN (most favored nation/normal trade relations) status. Therefore, if the debt cannot be
rescheduled, on July 1, when payment would otherwise be due, Russia would either be forced
to make the payment or stand to lose its MFN status.
Bank of New York Scandal. In August 1999, newspaper reports of a possible transfer
of as much as $10 billion in Russian money through the Bank of New York inspired a number
of political commentators to link the occurrence of widespread corruption and capital flight
in Russia (neither new nor startling revelations) with an indictment of the Administration’s
foreign policy toward Russia and especially the role of Vice President Gore who is identified
with U.S.-Russia policy by virtue of his co-chairmanship of the Joint Commission on
Economic and Technological Cooperation. The Joint Commission acted as a conduit for
discussion on key aspects of U.S.-Russia relations, including trade, investment, space, and the
environment, and often made recommendations on use of assistance to facilitate these matters.
Some of the news reports implied that international aid funds may have been directed
through the Bank of New York. If any donor funds were diverted, it is not likely to include
U.S. bilateral economic assistance. The U.S. aid program is not delivered in the form of a
large monetary grant. Most aid is in the form of U.S. technical expertise and equipment to
the public and private sectors, credit assistance to small business, and project grants to NGOs.
Some serious abuse questions were raised with regard to the U.S. food aid program in 1993,
but the Department of Agriculture insists that its current aid program is closely monitored.
Although balance of payments loans provided by the International Monetary Fund are liquid
and provided on a large scale, there is no evidence as yet that any IMF funds are among those
involved in the Bank of New York investigation. The possibility of a diversion, however,
prompted Representative Jim Leach to suggest that IMF loans be suspended until steps are
taken to insure money is not diverted. The Administration has pointed out that IMF loans
CRS-11

---

IB95077
06-15-00
under the existing loan agreement do not leave the IMF — they cover repayments of
previous loans — an approach initiated largely because of concerns regarding possible misuse.
The Bank of New York issue has been used by some political commentators to suggest
that the Administration and Gore mishandled U.S.-Russia policy, partly by continuing to
provide aid to Russia despite its descent into corruption, and by using aid to support the
privatization process that some believe allowed the so-called oligarchs in Russia to achieve
the vast wealth many in Russia associate with corruption. Other commentators variously
point out that corruption long predated the current system and that U.S. support for
privatization was an effort to rapidly ensure that communism could not return. Besides its
support for privatization, U.S. assistance, they note, has helped strengthen an incipient
democratic system and free market economy through support for new businesses, non-
governmental organizations, a free press, a stock exchange, and local government.
Some observers believe that critics of U.S. policy overestimate the power of U.S.
assistance to meet U.S. foreign policy objectives. While it is argued that both the Bush and
Clinton Administrations might have exercised more influence to prevent corrupt practices and
insure the adoption of economic reforms using the leverage of IMF and other international
financial institution resources, others argue the bilateral aid program, often due to
congressional constraints, has been too small to have a decisive influence over events in
Russia. In any event, some note, not only is Russia not yet “lost”, it was never ours to “lose”.
Aid to the Other Republics
Ukraine. By virtue of its size and location, Ukraine is one of the more important of the
FSU countries to the United States. With the support of a strong U.S. ethnic lobby, $225
million in aid has been earmarked for Ukraine each year since the FY1996 appropriations,
making it the largest FSU account recipient in those years. For FY1999, $195 million was
earmarked for Ukraine. In a departure from previous practice, the FY2000 appropriations
recommends, but does not require, that $180 million be provided to Ukraine. The
Administration has allocated $160 million but could add additional funds if Ukraine adopts
economic reforms. For FY2001, the Administration has requested $171million for Ukraine.
S. 2522 would provide $175 million.
To the degree that FSU aid is predicated on a country’s adoption of economic and
political reform, Ukraine, has not lived up to expectations, delaying or rejecting privatization
efforts and other reforms. Several years ago, this led some in Congress to question the level
of funding provided to Ukraine, especially in view of news reports of the ill-treatment of U.S.
businessmen. As a result, almost half of earmarked appropriations were withheld pending
determinations – in FY1998, that issues affecting U.S. investors were resolved, and, in
FY1999, that progress on economic reform was being made. The FY2000 appropriation bill
dropped such conditions. Reports in March 2000 that Ukraine had abused its IMF loan
program may have consequences for the U.S. bilateral aid program.
Central Asia. One rationale presented by the Administration for the Partnership for
Freedom initiative in 1997 was that it would mean a substantial (in some cases threefold)
increase in funding for Central Asia and Russia. The Central Asian states had been relatively
neglected by the aid program in previous years but are of increasing interest to the United
CRS-12

---

IB95077
06-15-00
States for their oil production and strategic location. While Congress did increase overall aid
levels to the FSU, earmarks for other countries fenced off much of the funds and Central Asia
benefitted little. The increase in funding for the FSU under the FY1999 appropriations,
however, permitted a 26% increase for Central Asia to $136.9 million, but in FY2000, the
account funding level, country earmarks, and ETR priority led to an allocation of $109.5
million. For FY2001, the Administration has requested $185.4 million.
Public discussion regarding Central Asia has highlighted two issues in which aid plays
a role in furthering U.S. interests in the region. In congressional hearings, Administration
officials have argued that increased assistance will help to build goodwill and cement a U.S.
role in exploiting energy reserves in the region and that aid can be used to facilitate a positive
business environment for U.S. investors, including assistance to help reform of the energy
sector. Some, however, have pointed out the potential conflict between U.S. support for
commercial interests in authoritarian governments, such as Uzbekistan, and U.S. support for
democracy and human rights. The Administration has argued that the aid program seeks to
“leverage as much democratic reform as possible” in these countries.
The Caucasus. Of the three Caucasus countries, Armenia and Georgia have been given
a high priority in U.S. aid funding, with money earmarked for both in amounts that make them
the highest recipients of FSU aid on a per capita basis. Azerbaijan, on the other hand, has
received relatively little assistance, most types of assistance, until recently, being prohibited
under Section 907 of the FREEDOM Support Act. In FY2000, the region is expected to
receive $242 million, representing 29% of the FSU account. For FY2001, the Administration
has requested $215 million for the region, including a sharp increase for Azerbaijan to $54.6
million, up from $31 million in FY2000.
Section 907 prohibits all aid to the government of Azerbaijan except for disarmament
related assistance until the President determines that the Azerbaijani government is taking
demonstrable steps to cease all blockades and other offensive uses of force against Armenia
and Nagorno-Karabakh, the enclave of Armenian ethnic people which has sought
independence from Azerbaijan (see CRS Issue Brief IB92109, Armenia-Azerbaijan Conflict).
The Clinton Administration has opposed Section 907 and has asked Congress to repeal it.
In the past, some Members of Congress have suggested that the Administration waive the
provision if it does not approve of it. However, domestic political considerations appear to
have discouraged such a move to date.
Congress has taken some steps to change the restriction. Beginning in 1994, there was
a concern that the restriction would impede the delivery of humanitarian aid, which may be
provided through private voluntary organizations (PVOs). A key problem was the need to
utilize Azerbaijani government facilities, doctors, and transport to move and administer
humanitarian supplies. In 1996, the FY1997 foreign operations conference report allowed
PVOs to deal with the government to meet humanitarian objectives.
Although the status of Nagorno-Karabakh has yet to be resolved and despite pressure
from the Armenian-American community, the erosion of Section 907 prohibitions has been
more serious since 1997, partly because many do not want the United States to appear to be
biased in favor of Armenia while playing a role in the Minsk Group that oversees the peace
talks, and, perhaps more important, because U.S. economic interests in Azerbaijan have
grown with the exploitation of oil resources by U.S. firms. The FY1998 foreign operations
CRS-13

---

IB95077
06-15-00
bill allowed both the U.S. Foreign Commercial Service and the Trade and Development
Agency to function in Azerbaijan. Although the House Appropriations Committee version
of the FY1999 appropriations, H.R. 4569, would have repealed Section 907 entirely, a Porter
amendment was adopted (231-182) on the House floor that struck the repeal language. The
final version of the FY1999 appropriations adopted Senate exclusions that allow OPIC, TDA,
Export-Import Bank, the Foreign Commercial Service, and democracy and humanitarian
activities. Under this FY1999 language, perhaps the only programs affected by Section 907
were economic and other policy reform type activities. The FY2000 appropriation bill
contains the same exclusions as in FY1999.
LEGISLATION
S. 2522 (McConnell)
Foreign Operations, Export Financing, and Related Programs Appropriations, FY2001.
Reported by the Senate Committee on Appropriations, May 9, 2000.
CRS-14

---