Russia and U.S. Foreign Assistance: 1992-1996

Russia and U.S. Foreign Assistance: 1992-1996

Order Code 96-261
CRS Report for Congress
Received through the CRS Web
Russia and U.S. Foreign Assistance:
1992-1996
March 20, 1996
-na-e redacted-
Specialist in Foreign Affairs
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

Russia and U.S. Foreign Assistance: 1992-1996
Summary
This report, written in 1996, provides historical background that may be useful
to Congress as it considers funding levels, types of programs, and problems in
implementation of U.S. assistance to other countries.
As defined by Congress in the FREEDOM Support Act and the pronouncements
of two Administrations, among key objectives of U.S. foreign policy toward Russia
are the promotion of a democratic system and a free market economy. Foreign
assistance has been a prominent tool of that policy.
Many factors in the United States and Russia have affected the course of the
U.S. program of assistance to Russia. In the United States, there has been some
expectation that the program would succeed quickly. When that did not happen and
Russian government behavior did not meet expectations, some sought to cut the
program. U.S. budget pressures also have affected the Russia program. Although
Russia has experienced much economic and political progress in a relatively short
time, this has been accompanied by an uncertain political situation exacerbated by
growing economic inequality. Nevertheless, supporters of reform are reportedly
emerging in all corners of Russia and these appear very pro-United States.
Criticisms raised regarding the assistance program during its first years are being
addressed by the Administration. Interagency coordination has improved, problem
programs cut or eliminated, reformers targeted, and assistance funds leveraged to
bring in other donors. Large contractors and grantees have improved their
operations, but some observers still feel that while small U.S. organizations can best
implement the program, they are the most threatened by cuts.
The assistance program is seeking to engage all levels of private sector and
democratic system development — at the top to promote policy reform, at the
institutional level helping to strengthen government and private sector organizations,
and at the grassroots to help individual businesses and NGOs (non-governmental
organizations). In order to expedite the reform process and help them avoid
mistakes, a major focus of assistance activity is the transfer of information to
reformist Russians who want to know how things are done elsewhere.
The budget for Russia has gone from $1.3 billion in FY1994 to $341 million in
FY1995 and an estimated $168 million in FY1996. Many programs are ending
earlier than originally anticipated and new ones not starting up. The consequences
of such an abrupt decrease in funding are not clear with regard to Russian
development in general but some fear that U.S. objectives in the country will be
retarded.
In 1994, the Administration informed Congress that technical assistance
requests would largely end after the FY1998 appropriation. Realizing that U.S.
interests regarding Russia would also not end at that point, individuals in the State
Department have begun to ponder the shape of U.S.-Russian relations in the future
and a “baseline” program of assistance that might be considered in the long term.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The United States and Russia: the Domestic and Foreign Policy Context of the
Assistance Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
U.S. Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Russian Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Assistance Program Implementation Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Speed of Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Coordination and Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Working Together . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Targeting Reformers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Program Quality Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Leveraging Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Implementors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Impact of Assistance Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Top-Down/Bottom-Up Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Promotion of a Free Market System in Russia . . . . . . . . . . . . . . . . . . . . . . 15
Policy Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Institution-Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Business Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Promotion of a Democratic System in Russia . . . . . . . . . . . . . . . . . . . . . . . 19
Policy Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Top and Bottom Institution-Building . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Grassroots Democracy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Issues for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Impact of Budget Cuts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
What Kind of Program after FY1998? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Russia and U.S. Foreign Assistance: 1992-
1996
This report, written in 1996, provides historical background that may be useful to
Congress as it considers funding levels, types of programs, and problems in
implementation of U.S. assistance to other countries.
Introduction
Four years have passed since the Soviet Union dissolved into 12 separate
nations. During this time, the Russian Federation, the largest of these states
geographically and demographically, has figured most prominently in the minds of
U.S. decisionmakers for its continuing arsenal of nuclear weapons, and its current
and, perhaps more important — potential — political, economic, and commercial
role in the world.
Determining that it was in the U.S. interest to see a democratic, free market,
more nuclear-secure Russia, the United States initiated a program of assistance to
promote these objectives. The 1992 FREEDOM Support Act program, funded
annually out of the Foreign Operations appropriations, concentrated resources on the
first two objectives.1
Much has changed since the program began and the issues of congressional
concern have also changed. At first, Congress debated the level of assistance
appropriate for the region in general and Russia in particular. By 1994, with large
sums having been appropriated specifically for Russia, the tone of the debate shifted
to two issues: implementation of the program — the pace of implementation,
effectiveness of activities, and adequacy of coordination among U.S. agencies; and
Russian behavior both internationally and domestically.
Now, in 1996, a new set of issues is beginning to define itself for congressional
consideration. These issues result largely from the strong downward trend in funds
for Russia programs and from other international and domestic events taking place
in Russia and the United States. In the past three years, allocations for Russia from
the NIS (New Independent States) account of the Foreign Operations appropriations
1 The Nunn-Lugar program, funded from Defense appropriations, focuses on the nuclear
disarmament and security concerns. It is not discussed in this report. For information
regarding this program, see U.S. Library of Congress. Congressional Research Service. The
Nunn-Lugar Program for Soviet Weapons Dismantlement: Background and Implementation,
by Theodor Galdi. CRS Report 94-985F, updated December 11, 1995.

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have gone from $1.3 billion in FY1994, to $341 million in FY1995, and an estimated
$168 million in FY1996. Administration officials and some Russia observers believe
this declining funding may directly affect the achievement of U.S. foreign policy
goals in Russia.
This report, based in part on an extensive series of interviews and site visits
conducted in Russia from September 12 to October 2, 1995, discusses the political
and economic climate in which the assistance program is currently operating, how
earlier concerns regarding the implementation of the program have been dealt with,
the impact the program has had to date, the effect of proposed budget cuts and
earmarks, and, finally, the long-term future of the program.
The United States and Russia: the Domestic and
Foreign Policy Context of the Assistance Program
Although all foreign aid is an instrument of foreign policy intended to meet U.S.
interests both short and long term, the program of assistance in Russia, in the view
of many, is more strongly rooted in U.S. policy priorities than similar programs
undertaken in other countries. Since 1992, the United States has sought to be
actively engaged in encouraging the transition of Russia from a one party socialist
economy to a democratic political and free market economic system. In the
FREEDOM Support Act, Congress suggested that the outcome of this transition was
a “vital interest” of both the United States and the international community.2
In the debate leading to the FREEDOM Support Act and in the language of the
Act itself, Congress stressed the threat to U.S. national security interests that the
assistance program would seek to overcome. Congress intended that the program be
as much a direct tool of foreign policy as possible. It gave decisionmaking power
over the program to an NIS Coordinator in the Department of State, not to the chief
implementor of the program and traditional foreign aid arm of government, the
Agency for International Development (USAID). It provided waiver authority to
allow the Administration to ignore other constraints on traditional foreign aid
programs in implementing the program for the NIS. And, due to its pivotal foreign
policy purpose, the program has been more closely watched by Congress than most
other assistance programs.
The executive branch has shared this view. In his early testimony on the
program, Secretary of State Baker noted that the FREEDOM Support Act supported
U.S. efforts to build a democratic peace. “In this regard,” he said, “it is every bit as
much a policy...as a legislative package.” Stressing the policy objectives that the
program sought to achieve, he hoped that “people would not look at this as a foreign
2 Russia’s continuing importance to the United States has been asserted by numerous
analysts and decisionmakers. Recently this was professed in a series of speeches by Vice-
President Gore on October 13, 17, and 19, 1995 and by Assistant Secretary of Defense for
International Security Policy, Ashton Carter, on June 20, 1995. See also CRS Report 95-
1126, Russia’s Future: Issues and Options for U.S. Policy, by (name redacted), November 15,
1995.

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aid bill, because it is not a foreign aid bill.”3 It was instead a “once in a century
opportunity to advance our national interests.” The Clinton Administration has
continued to stress the specific foreign policy objectives of the Russia program, but
greatly increased the amount of resources devoted to that effort and upgraded its
foreign policy importance an additional notch by associating it with the Gore-
Chernomyrdin Commission process of expanded cooperation and, more recently,
strengthening the role of the State Department.
While its distinctive and immediate foreign policy goals set it apart from other
foreign aid programs, there are aspects of the Russia program that have served more
traditional foreign policy purposes. From the beginning, the program was seen as an
expression of support for broad events taking place in the region, and in 1993, the
Administration’s request for a $1.8 billion Russian assistance package was described
as a specific demonstration of support for Yeltsin. The program, like assistance
programs elsewhere, has also served short-term objectives. A program offering
apartments to former Russian officers, for example, reportedly encouraged the
withdrawal of Russian troops from the Baltic states by August 1994.
But, in the main, the program has sought to facilitate the move toward
democracy and a free market economy. The success of that effort depends in part on
the way in which the program is implemented in the field. But it also depends on
political and economic developments emanating from both Russia and the United
States.
U.S. Context
Although it is tied closely to U.S. foreign policy objectives, the assistance
program has come under periodic challenge and now appears headed toward an early
end without any close reconsideration of those objectives. A number of factors have
contributed to this turn of events.
One has been the perhaps unrealistic expectation that the transformation of
Russia to free markets and democracy would be relatively smooth and short-term.
While Administration figures repeatedly noted the difficulties the program faced,
they raised expectations by suggesting that the program might achieve its objectives
by the turn of the century. Some doubt, however, that feasible aid programs can have
more than marginal effects on a nation of Russia’s size and complexity. Further,
although there has been strong bipartisan support for the broad objectives of the
program in the foreign policy community and among Members of Congress, details
of program implementation and the behavior of the Russian government have drawn
heavy criticism since the program was launched.
Concerns regarding how the program was being carried out on the ground in its
first three years — its speed, coordination, impact, and the like — have seriously
3 Testimony before the House Foreign Affairs Committee, April 30, 1992, Reuters
Transcript.

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affected current attitudes.4 Some of the criticisms now appear unfounded and some
derived from misunderstood accountability and legislative requirements. Some
concerns were clearly legitimate and needed attention. Since a great many people
had a personal or professional interest in this program — among them, potential
contractors, non-governmental organizations, and Russia “experts” — there were
diverse and contradictory expectations of what sectors and projects it should
emphasize and what it should ignore. The unique level of attention paid to the
Russia program heightened the sound of critical voices and created the impression,
still difficult to mend, that it was a failure and a mess.
Disappointment of early expectations by some observers that its economic and
political transformation might mean a compliant Russia has probably helped
undermine support for the assistance program. While U.S.-Russian relations are a
significant improvement on the Soviet era, certain Russian government domestic and
international policies have caused some Members of Congress to question the
program’s emphasis on Russia to the exclusion, in their view, of other NIS
countries.5 In addition, many Members of Congress continued to associate it
negatively with other foreign aid efforts as a “giveaway” program, suggesting to
many that cash was being transferred directly to the Russian government.
The perception that the Russian government was the chief beneficiary was
exacerbated in late 1994 by growing disgruntlement over the Chechnya situation and
the potential sale of nuclear energy facilities to Iran. In the 1995 debate on both the
FY1996 foreign aid authorization and appropriations bills, some Members sought to
cut off aid unless Russia changed its policies in these and other areas. Defenders of
the program, including the Administration, pointed out that U.S. aid levels were
hardly enough to compensate for profits lost from the Iran sale. They further argued
that little of the assistance actually went to the Russian government, but instead to
reformist elements whom it remained in the U.S. interest to support.
The deficit reduction priorities of the 104th Congress, combined with the above
perceptions, contributed to the cuts in the Russia program in the FY1996 foreign aid
appropriations bill. As Congress takes up a FY1997 appropriation debate, it faces
new concerns. The December 1995 parliamentary election saw a resurgence in
communist support that suggests the possibility of a communist victory in the June
1996 presidential election. Subsequent anti-reformist moves by President Yeltsin
have further exacerbated concerns. Some suggest it is not now clear that it is in the
U.S. interest to help Russia become economically strong.6 This argument seems to
caution that Russia’s anti-reformist course is the most likely outcome, with or
4 These concerns are discussed in detail in CRS Report 95-170, The Former Soviet Union
and U.S. Foreign Aid: Implementing the Assistance Program, by (name redacted), January 18,
1995.
5 Russia activities have received a major portion of FREEDOM Support Act funding in
absolute terms — accounting for 54% of FY1992-93, 61% of FY1994, 42% of FY1995
funds, and expected to receive about 25% of FY1996 funding. Russia is behind Armenia,
Kyrgystan, Georgia, Moldova, and Kazakhstan in ranking of assistance on a per capita basis.
6 For example, see Charles Krauthammer, “It’s Their Economy, Stupid,” Washington Post,
February 9, 1996.

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without aid. Others believe this may ignore the complexity of the change going on
at every level of government and society.
Russian Context
A number of features of modern Russia might be seen to bear on the shape and
conduct of the U.S. assistance program. There is both good news and bad news:
what seems certain is that the country is in flux; it is a mass of contrasts and
contradictions; and no clear pattern has emerged from which U.S. policymakers and
analysts of any stripe can take comfort.
On the positive side, the pace of Russia’s transformation is stunning. Tens of
thousands of businesses have been privatized and new ones established. Inflation has
fallen from 2,600% in 1992 to 131% in 1995. Following years of negative growth,
the IMF predicts GDP growth of between 2.2 and 4% in 1996 and perhaps more than
6% in 1997. Certainly, visual impressions of Moscow support the predictions.
During the past two years, Moscow has remade itself. There are now supermarkets,
restaurants, attractive shop display windows, and construction everywhere. A middle
class is being established. Russia has adopted a constitution that provides protections
for individual rights and has held several free and fair elections. Whatever the
changing composition of executive or legislative branches, adoption of reforms has
continued to advance, although in a somewhat wobbly course. These are remarkable
developments given the distance the country has had to come since 1991.
Growth, however, has not occurred evenly, either in a geographic sense or for
all income levels. To an American observer, Ekaterinburg in the Urals appears
perhaps two years behind Moscow, and Novosibirsk in Western Siberia appears stuck
in the Soviet era. Some of the contrast is attributable to the presence or absence of
reformist elements in different legislatures and city governments throughout the
country. An underfunded and mismanaged social safety net has contributed to an
ever widening gap between rich and poor, but new opportunities for innovative and
creative capitalists, as well as for self-aggrandizing politicians, are also responsible.
Further, economic progress is hostage to the uncertain outcome of national elections.
While past experience indicates that even nationalist or communist political figures
may support a limited reformist agenda, the unpredictability of the political situation
works against broad economic progress. Economic success might suggest a more
positive political outcome, but perhaps the chief beneficiaries of the transition to free
markets are the new generation of entrepreneurs, a great many under 35 years of age.
However, this group is notoriously cynical about politics and many are thought not
to have voted in the December 1995 election that saw great advances for communist
and nationalist forces.
Russian views regarding the United States have been as varied and contradictory
as the twists and turns of their economic and political affairs these past few years.
One encounters business and government figures at all levels who voice the desire
for U.S. investment (“the Germans are here, the Dutch are here — why don’t the
Americans come?”). Parliamentary staff at the national level as well as local city
government officials express a strong desire to see the assistance program evolve into
a higher level of mutual cooperation between the two countries in a wide range of
sectors. Respect for the United States is embodied in their strongly expressed interest

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in learning from American experience in all areas where reform is being initiated.
On the other hand, one encounters considerable cynicism about the Western effort
to help Russia during its difficult time of transition. Some individuals suggest that
the aim of all U.S. activities in Russia is to undermine the Russian economy and
make it dependent on U.S. business. Businessmen and other private sector leaders,
however, seem consistently favorable to reform and the United States.
A major challenge for the U.S. assistance program has been to work within this
uncertain, ever-changing, landscape. Implementors of the program have had to
identify the reformers in each sector, and determine where assistance might most
effectively be used. Although Americans and even Russians ask whether the aid
effort is invisible, nationalist sensitivities prevent the United States from advertising
its presence too broadly. Despite the difficulties inherent in the Russian scene,
however, the U.S. assistance program, as discussed in part three of this report, has
managed to craft numerous points of cooperation with Russians at all levels of the
public and private sector and in all parts of the country.
Assistance Program Implementation Issues
As noted above, a number of concerns and criticisms of the assistance program
have been raised since its inception. A January 1995 CRS Report, The Former Soviet
Union and U.S. Foreign Aid: Implementing the Assistance Program (CRS Report 95-
170F), reviewed these issues and concluded that, while many of the criticisms no
longer held true for the program, there remained issues that Congress might wish to
track carefully in order to insure a well implemented and successful program. These
issues included the extent to which programs were implemented rapidly, reached the
grassroots, advanced privatization, fostered agency and project coordination,
produced visible results, were subjected to regular evaluations, terminated bad
projects, targeted reformers, and leveraged private sector funds. Many of these
concerns are updated and discussed in this and the following section.
Speed of Implementation
Perhaps the most important criticism of the program in its first years was that
it was slow in getting activities on the ground. Visitors in 1993 found a dearth of
projects in Russia, and, as late as April 1994, House leaders Richard Gephardt and
Robert Michel found the program slow in delivery and lacking intensity. But the
September 1994 bipartisan delegation led by Senator Patrick Leahy returned with
quite a different picture. It found the program “in full operation.” And a visit one
year later supports that judgment. There is now a wealth of activities underway and
hundreds of organizations — contractors, grantees, NGOs (non-governmental
organizations), and Russian indigenous groups — funded in some way by the NIS
account. With funding on the decline, the program has apparently hit its peak, and
the number of project activities can be expected to decrease noticeably during 1996.7
7 For a broad list of activities funded from all sources and managed by all U.S. government
agencies, see GAO report, Former Soviet Union: Information on U.S. Bilateral Program
(continued...)

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Coordination and Strategy
There are two key players under the FREEDOM Support Act program: USAID
and the State Department. Foreign operations funds are appropriated to USAID,
which transfers some of the money to other agencies, but has maintained
responsibility for 85% of the program. The State Department, through its NIS
Coordinator, has been responsible for overall design, direction, and oversight of the
program. But more than 20 U.S. agencies are in some way involved in program
implementation, some using their own budget funds in addition to those supplied
under the foreign operations NIS account.
Most of the early coordination concerns for a program implemented by
numerous agencies are largely resolved.8 In sum, the few apparent activities and the
quite apparent bureaucratic infighting had led to criticisms regarding a lack of
leadership and direction in the program. A proliferation of activities and the more
regularized drawing of agency responsibilities over time suggest that the NIS
Coordinator in the Department of State, Ambassador Thomas Simons, had the
problem in hand by mid-1994.9 However, the original expression of congressional
concern ultimately led, after a prolonged talent search, to his replacement in March
1995.
Richard Morningstar, a former Vice President of the Overseas Private
Investment Corporation and businessman, arrived with a different perspective and
with expanded authority as an Adviser to the President and a mandate that includes
the Department of Defense’s Nunn-Lugar program. He initiated a top-down review
that included putting holds on all obligations he considered questionable until they
could be justified. Coming late in the fiscal year, the holds created added pressure
and paperwork for USAID staff and slowed its obligation rate.
7 (...continued)
Funding, December 1995, GAO/NSIAD-96-37. A rough USAID count of its Russia project
activities shows 103 such activities in 1992, 275 in 1993, 343 in 1994, and 307 in 1995.
8 For more on this issue, see GAO, Former Soviet Union: An Update on Coordination of
U.S. Assistance and Economic Cooperation Programs, December 1995, GAO/NSIAD-96-
16.
9 Much of the infighting was between USAID and other agencies to which it transferred
funds as directed by the Coordinator’s office without necessarily transferring responsibility
for accounting for use of those funds. As a USAID source noted, “Early on, there were
questions as to the level of USAID’s accountability for the use of these funds. This still
remains a problem in a few cases where the other agency and USAID actually participate
jointly in activities and where other USAID contractors are also involved (e.g., EPA work
on environmental problems, Treasury work in the tax reform area). However, in other cases,
it has been determined that USAID is not accountable (DOE work in nuclear safety, TDA
feasibility studies, DOC’s American Business Center program, performance of the
Enterprise Funds). This has led to a satisfactory (from USAID’s point of view) delineation
of relative responsibilities, but may not be contributing to the most effective Russia program
overall.”

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With different leadership styles, both Coordinators have shaped the program
through their authority over the pursestrings. As such, the Coordinator is the final
arbiter of interagency disputes. These disputes may well increase as funding levels
decline and difficult decisions regarding priorities are made. The top-down review
was a beginning of such a process.
In the field, an early response to coordination concerns was the appointment in
September 1994 of an assistant to the Ambassador, Susan Johnson, to head a newly
set-up Ambassador’s Assistance Unit (AAU). Her primary role is to track, monitor,
and assess U.S. programs on behalf of U.S. Ambassador to Russia Pickering. In the
summer of 1995, she began to provide assistance to the Coordinator as well, starting
informally with the top-down review. During her tenure, she has attempted to
facilitate “bottom-up” coordination. There is a heads-of-agency meeting in Moscow
twice a month. She has also developed relationships with the three consulates
general in Russia — St. Petersburg, Ekaterinburg, and Vladivostok — and uses them
to facilitate coordination in the field. Each of these has monthly meetings to brief
and debrief contractors and grantees.
An ever shifting series of issues captures the attention of both the AAU in
Moscow and the NIS Coordinator in Washington, for which specific disagreements
between players must be sorted out. For example, USIA and the Embassy
Economics section raised the political sensitivity of a USAID proposed public
education project on economic reform that would be run by First Deputy Prime
Minister Chubais’ press representative. The AAU arranged a meeting of all
concerned that, reportedly, led to a reworking of the project.
Both the AAU and the Coordinator’s Office have recently been examining the
division of labor between USAID and USIA in their respective conduct of training
and exchange programs. Both types of programs are, sometimes subtly, different, but
their targeted recipients at times overlap. The goal is to avoid redundancy and use
more efficiently the greatly reduced funds available for these activities. USIA
exchanges already complement USAID project activities to some extent. They can
be used to support economic and democratic reform by bringing appropriate officials
and private sector individuals to the United States for focused tours and educational
programs. Targeting of USIA exchanges to support USAID project objectives could
likely be increased.
The role of the Support Implementation Group (SIG) has also been an interest
of State and the Embassy. The SIG was established by the G-7 to help them
coordinate bilateral assistance programs for Russia.10 While it has served as a forum
for exchange of information, some question whether there have been any concrete
results. Increasingly, both the Embassy and the State Department are turning their
attention to the future of U.S.-Russian relations in the long term and what kind of
programs and the financial resources to support them will be needed. This issue is
discussed in the last section of this report.
10 The G-7 are the seven most powerful industrial countries which meet annually to discuss
economic and political issues.

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The purpose of State Department coordination is to better accomplish the
objectives of U.S. foreign policy in Russia. To that end, the Coordinator’s Office
developed a written strategy which was approved in May 1994. It has evolved as
circumstances change, but the assistance program continues to reflect a focus on the
two key objectives first enunciated in the FREEDOM Support Act — the
establishment of democratic institutions and a free market economy. There is ample
evidence that individual projects are not approved unless they fit within the overall
strategy and most projects can be said to contribute to the two main objectives. Even
programs in the health, environment, energy, and housing sectors — some the result
of congressional or other political pressures — are molded so that they feed into the
two strategic goals.
As the largest agency implementor, USAID continues to play a major role in
shaping the strategy and the program. The State Department, the Embassy,
USAID/Washington (the Bureau for Europe and the NIS) and the USAID mission in
Moscow are all attuned to different features of the assistance landscape.
USAID/Moscow, in particular, is dealing with the nitty gritty of developing projects
and working perhaps most closely with the Russian beneficiaries. All four appear to
have significant input in most programmatic decisions. Some observers find their
disagreements messy, but, if properly coordinated, their diverse range of views can
strengthen the quality of implementation and results. Current evidence suggests that
this is what is happening.
Effectiveness
There are numerous elements, explicit and implicit, in the U.S. assistance
strategy that seek to make the program more effective. Chief among these are getting
implementors to work together, targeting reformers, terminating bad programs, and
leveraging private sector funds.
Working Together. While State coordinates and shapes the program at the
level of U.S. government agencies and programs, USAID coordinates the activities
of hundreds of project contractors and grantees under its broad program. Each
month, heads of democracy projects meet at the USAID mission in Moscow to
exchange information. Implementors report that they are being encouraged by
USAID to find ways to work together. For example, every month all of the Rule of
Law implementing organizations in Moscow meet without USAID and try to
coordinate activities. From observations made in 1995, it appears that implementors
outside Moscow are substantially better informed regarding other assistance activities
that might facilitate their own than had been the case in 1993. Entrepreneurial
centers, established in a number of cities, draw on the expertise and programs offered
by other U.S. organizations working to help the indigenous and U.S. private sectors.
Russian businessmen are informed about relevant opportunities at these centers.
Targeting Reformers. Seeking to promote profound economic and political
change in Russia, the program has been highly responsive to reformist tendencies in
both central and local government. One reason that the program was slow to get
under-way was a dearth of identifiable reformers in many sectors. Early on,
therefore, when then Minister for Privatization Chubais and the Privatization Agency,
GKI, requested assistance, USAID heavily supported its activities to privatize

CRS-10
business, and it continues to devote resources there. The United States now
underwrites the development of legal, financial market, tax, and other reforms.
These efforts are discussed in the following section.
In the hinterlands, the assistance program has ferreted out reformist oblast and
city governments. Pilot demonstration projects, such as an effort to test new health
care systems and financing arrangements, and housing reform, are being conducted
in select towns receptive to new approaches in the expectation that success at one
level will be translated more broadly. To some extent, however, there has been a
disconnect between the emergence of reformers and the availability of funding.
Now, as more institutions are coming to understand the need to reform, it appears
that the funding to help them do so has begun to disappear.
Program Quality Control. One sign of a well monitored and evaluated
program is the extent to which inadequate programs are revised and bad ones
terminated. Despite an apparent insufficiency of USAID staff for tracking projects
in the field, there is substantially more evidence of this process now than one or two
years ago.11
Among projects found wanting was the health care financing project. USAID
was unhappy with the speed of implementation, was dissatisfied with the workplan,
and did not respect the project manager. Consequently, USAID forced his
replacement, trimmed back the project — cutting funding from $26 million to $19.3
million — and focused the program on one region, Siberia.
In the spring of 1995, the NIS Coordinator combined the Russian-American
Enterprise Fund with the Fund for Large Enterprises in Russia. The Russian-
American Fund had once been called an “undemonstrated success” by the U.S.
Ambassador, because it had only one loan to show in its first one-and-a-half years of
existence. The Fund for Large Enterprises was likewise unimpressive — it had only
three investments (one of which was a joint venture with Caterpillar and another with
Pepsi Cola). The new entity — The U.S.-Russia Investment Fund (TUSRIF) — has
reduced overhead and appears to be making a greater effort to locate appropriate
investments by sending staff into the field to seek out new businesses and by working
with the Business Service Centers. Nevertheless, to some it remains an example of
poor quality control because of its status independent of normal U.S. government
accountability requirements.12
11 In numerous interviews, contractors and grantees generally praised their relationships with
AID mission staff, but expressed dismay that their projects were rarely, if ever, visited. A
GAO report, Assessment of Selected USAID Projects in Russia (GAO/NSIAD-95-156,
August 1995), also suggested inadequate USAID monitoring. However, in spite of existing
and growing constraints on administrative funding and personnel levels in Russia, there is
evidence that the mission is at least closely following priority issues and problem areas, as
noted in this section.
12 12 There are other, more generic, potential problems with enterprise funds, especially the
conflict between their developmental purpose and “profit-making” mandate. Also, many
argue that if a business is economically viable, particularly the medium-sized businesses
(continued...)

CRS-11
There is ample evidence of a continuous reworking of the assistance program,
a reassessment of priorities, and efforts to mold the program to meet core objectives.
For instance, in its first incarnation, a USAID program to help emerging NGOs —
the nuts and bolts of democratic societies — focused on essentials, getting some up
and running through partnerships with U.S. NGOs. A follow-on project now focuses
on helping NGOs advocate their views to government as well as raise funds from the
private sector to make them sustainable. It concentrates on NGOs with potential to
have an impact on economic and democratic reform.
Congressionally mandated rescissions (cancellation of previously appropriated
funds) for the Russia program in FY1995 have been taken in part from slow-moving
programs, such as the Commodity Import Program (CIP) and the Pharmaceutical
Production Program. Some questionable activities have been terminated entirely,
such as the Russian Social Conversion Project (ROSCON), an effort at social
marketing of the economic reform program.
Certainly there remain questionable or problematic activities. As with all
projects, some will have defenders, some critics. For instance, some think the
Morozov project, which franchises business education to institutes of education
throughout Russia, may be stretched too thin; that there are insufficient funds to pay
for study materials and equipment, and, as a result, quality suffers. Some suggest that
the Commerce Department’s American Business Centers, set up to assist U.S.
businesses seeking to invest or trade in Russia, are not likely to succeed as self-
financing entities in some of the less frequented locations. But a more important
issue is that their presence and name seem to confuse Russians who are often turned
away when they go for help. This contributes to the Russian notion that the United
States is only out to help itself.
After taking an extremely long time to get under-way, the ARD/Checchi Rule
of Law project may not be well focused or perhaps suffers because the indigenous
desire to reform the judicial sector has arrived too late for U.S. funding availability
to have an impact. Some projects still suffer from delays in the provision of
equipment: the Commodity Import Program, the EPA program in Nizhny Tagil, the
Business Support Centers, and the Morozov project to name a few. And some
question priorities: should business assistance, for instance, rely on seminars geared
to tens or hundreds of attendees or should funds be used more for direct and pertinent
business advice to a dozen entrepreneurs or even single businesses?
Leveraging Funds. From the start, policymakers believed that funding from
the U.S. government program alone would be inadequate to achieve the objectives
they sought. Private sector and other donor organizations, particularly the
International Monetary Fund and World Bank, were thought to be a necessary source
12 (...continued)
targeted by these funds, private investment would occur. They argue that TUSRIF diverts
assistance money that would be better employed creating the environment for private sector
investment — supporting policy reforms and small business development and training. See
CRS Report 96-27F, Enterprise Funds: Overview and Issues of Concern by Mary Reintsma
and (name redacted), January 3, 1996, for further discussion.

CRS-12
of funds. The United States, therefore, has sought to help Russia establish an
environment attractive to foreign investment and has also sought to leverage its funds
to draw in private sector and other donor contributions.
Much of the USAID assistance program (see below) is devoted to the kinds of
policy reforms that provide a business-friendly environment. Further, the NIS
account funds Department of Commerce and Overseas Private Investment
Corporation (OPIC) activities that would attract U.S. business to Russia. Although
the United States is currently the number one investor in Russia (representing $2.5
billion of a total $4.5 billion in foreign investment), it is not clear whether U.S.
government program incentives are responsible.13
U.S. efforts to draw in U.S. business by offering financial support in certain
developmental sectors have not worked well. One, the Agribusiness Partnership
Project, sought the establishment of joint ventures between U.S. agribusinesses and
Russian agricultural enterprises, with the former’s contribution surpassing USAID
funding by at least 2.5 times. As a GAO report pointed out, U.S. firms would likely
have invested without any government incentive and there was little systemic reform
as a result of these ventures. The program has been discontinued.14 The
Pharmaceutical Production Project, designed to encourage U.S. investment in that
sector, also fell below expectations. One firm dropped out completely and two of the
three firms maintaining their interest in the project had not met the requirement to
submit viable business plans more than one year after receiving USAID grant funding
for development of their feasibility studies.15
USAID also funds non-commercial, cooperative undertakings that leverage U.S.
private sector participation. Under the Hospital Partnerships project, the U.S.
government funds travel of personnel and pays for transport of medical equipment
and drugs donated by participating U.S. hospitals. The USAID Media Project is
trying to create partnerships between Russian and U.S. wire services and television
networks. As this is a non-commercial endeavor, U.S. media enterprises have little
incentive to join, apart from goodwill.
USAID has had significant success in laying the groundwork for World Bank
funded programs. The World Bank usually does a broad feasibility study of proposed
loan activities but is not able to conduct the kind of pilot projects that might
strengthen the content of its loan programs. In a number of instances, the Bank has
come into a sector that follows-up what USAID began, sometimes employing the
same contractors used by USAID. One result has been that U.S. priorities are
bolstered by the Bank program. For example, World Bank interest in the coal town
of Kemerovo was purely related to energy concerns, but USAID work in a broader
13 Economist Intelligence Unit, Country Report: Russia, 3rd quarter 1995, p. 32.
14 GAO, Assessments of Selected USAID Projects in Russia, August 1995, GAO/NSIAD-95-
156, p. 58-63.
15 Two or three U.S. firms will likely eventually establish facilities. However, in the
extended interim between project start-up and the actual functioning of U.S. production
facilities, improvements in Russia’s own pharmaceutical industry have greatly reduced the
once-pressing need for pharmaceutical supplies, the original rationale for the program.

CRS-13
range of connected social and labor issues attracted the Bank into those areas as well.
USAID is currently helping the Bank to design a $500 million coal sector
restructuring loan. In July 1993, USAID began providing technical assistance that
led to the design of a $400 million Bank housing sector loan, approved in March
1995. The Bank is also providing appropriate medical equipment in support of a
USAID program to help shift Russia to a family practice emphasis in health care.
While the Bank has the financial resources to have a major impact on Russia’s
economic and social system, some wonder if its activities can fully compensate for
programs geared toward meeting U.S. policy objectives and providing a U.S. point
of view.
Implementors
Some controversy has existed over which entities could better implement the
assistance program on behalf of the U.S. government.16 Some argued for small
organizations versus large ones, and PVOs (private voluntary organizations) or
NGOs versus for-profits. The distinctions between these categories are too blurry to
track precisely. All have their share of successes as well as incidents of delay and
poor leadership. However, some of the larger organizations, including both non- and
for-profits, have drawn attention because they won sizable contracts to undertake
significant portions of the assistance program, yet they had a particularly hard time
getting their programs under-way, and therefore may have wasted funds in the
process. Critics suggest one reason for the problems these programs encountered was
their lack of previous Russia experience and failure to utilize Russian nationals.
Since these charges were originally made, it would appear that USAID has
moved more funding to smaller organizations. Although designation as PVO or
NGO is not a precise reflection of size, USAID statistics do indicate that, in FY1994,
6% of obligations went to such organizations, while they accounted for 16% of
FY1995 obligations.17 Supporters of small organizations, however, remain
concerned that future budget cuts will affect the small organizations
disproportionately and are further concerned that only limited mechanisms exist to
fund small projects at the under $1 million mark for either for- or non-profit U.S.
organizations. They argue that funds should be found, perhaps shifted from large
programs, to support the proposals of small U.S. organizations, including support for
U.S. partnerships with indigenous Russian groups.
With the advantage of hindsight, small organizations should probably have been
used more extensively in the first years of the program. They have often done an
outstanding job at relatively low cost, and stories about their activities carry an
almost visceral public relations appeal. Given the risks inherent in the assistance
16 See Lubin, Nancy. Aid to the Former Soviet Union: When Less is More, March 1996,
Project on the Newly Independent States, Washington, D.C.
17 Though comparable, these proportions undercount small organization activity. USAID
statistics lump international organizations into the same category as NGOs and a number of
small organizations, such as universities and nonprofits were not counted in FY1994. In
FY1995, they represented 11% and 12%, respectively.

CRS-14
program, one could take more chances with small amounts of money without fear of
wasting alot.
However, earlier concerns raised about large entities appear increasingly moot.
Those with problems getting underway are now up and running. There is much less
of the “fly-in fly-out” mentality that disturbed Russian recipients; generally, large
programs have come to rely on long-term resident U.S. citizens to manage their
programs and act as liaisons with the Russian government. Short-term technical
assistance personnel supplement their work and respond to specific needs.
Moreover, long-term staff have now been in-country long enough to develop
considerably more knowledge about the country and sensitivity to Russian recipients
than before. The vast majority of staff — at all levels — are Russian nationals.
Portions of their budgets are also subcontracted out to smaller organizations,
including NGOs.18 Further, the downsizing that has occurred as a result of budget
cuts and program revisions has cut into some of the most criticized large-
implementor programs.
It could be argued that the size of the implementing organization has been of
less importance to the quality of the product than has been a failure of project
conception at the outset. Large implementors initially were working with very broad
and changing terms of reference. Where the project objectives have been fairly clear-
cut, such as in privatization and economic reform projects, the large contractors
appear to have done well, drawing on their strength of being able to provide top
expertise quickly and saving USAID management problems that might come from
working with multiple small organizations. Where projects are not well thought-out
and agreed in advance between all parties, or are dispersed over numerous activities
— the rule of law, health reform, and business assistance projects — there are more
instances of questionable activity which may have led to more USAID
micromanagement rather than less.
Impact of Assistance Program
While critics were assailing the program during its first three years, it was still
too early to know whether the vast majority of programs were having any impact on
U.S. policy objectives. Now, however, with hundreds of projects on the ground,
many of them about two years old, one can begin to assess their worth.
No single project or group of projects can be said to decisively bring about
democracy and free market economies in Russia or anywhere else. There are just too
many variables, exclusive of the projects themselves, that can work to bring about
these objectives or to thwart their achievement. But one can discern, albeit
18 Rather than direct funds through large organizations with excessive overhead costs and
no experience in these matters, critics argued that it would have been more effective and
efficient to funnel grants through umbrella organizations like Eurasia Foundation, World
Learning (no longer funded), and ISAR that were already dedicated to the function of
providing grants to NGOs in Russia.

CRS-15
somewhat subjectively, how projects may or may not be contributing to the ultimate
objectives.
Several things can be said about the U.S. assistance program at this time. One
is that, however disparate the program may appear, most activities, even many of
those in the health, environment, and other sectors, are mainly geared toward
affecting adoption of democratic institutions and free markets. Second, the
substantial influx of funds that came out of the FY1993 supplemental/FY1994
appropriations has been used to move towards these objectives from all angles.
Some activities will have more impact than others. But, for the short period of time
that the surge in funds lasts, the U.S. assistance program has become a dynamic
program. Third, many of these projects are contributing in small and large ways
towards the two key U.S. foreign policy objectives. It can be argued that the program
might be strengthened, that projects might be made more effective, but, overall,
measurable progress is being made.
Top-Down/Bottom-Up Strategy
The methodology employed by the United States to encourage the desired ends
in Russia of democratic institutions and free market economy is essentially a two-
pronged approach. Some projects seek to strengthen the institutions that make policy
and help them to reform that policy. Meanwhile, other projects target organizations
and institutions at the grassroots level of society whose voices might impact the
higher level institutions. This approach is occurring in most of the sectors targeted
by U.S. assistance, but it is most pronounced in the two areas of greatest resource
concentration.
Influencing the top has largely meant offering U.S. technical expertise to
lawmakers in the Duma, policymakers in the President’s administration, and, to a
lesser extent, regional and local government officials. Both of the national bodies
have been seeking to rewrite the laws of the old order and establish a rule of law to
reflect the new system of government. U.S. officials and contractors have found
reform-minded Russians to be interested primarily in learning from U.S. and other
country experiences, both bad and good, as they attempt to reform tax, commercial,
criminal, civil, election, and other laws.
At the grassroots level, U.S. programs respond to the Russian desire for
knowledge of “how it is done elsewhere.” But there is also a great deal of training
activity and small-scale funding of charity, business, and public interest
organizations, most of which did not exist under the Soviet regime and which want
to learn how to become sustainable and more effective. At this level, too, individual
businessmen and farmers are learning the ropes and seeking credit and market
contacts.
Promotion of a Free Market System in Russia
The United States has been particularly effective in working on free market
issues. Unlike the more problematic democracy sector, where various sensitivities

CRS-16
force the U.S. program to work on the margins, in the economic sector, it has, at least
until now, been able to participate fully.
Policy Reform. The majority of policy reform projects bear on the future of
the free market economic system — by establishing predictability for the business
community and creating efficiencies in the housing, health, and energy sectors. Up
to now, U.S. advice has been or is being provided on tax law, bankruptcy law, health
care systems, commercial law, energy restructuring, financial markets, securities law,
land and real estate law, and other areas.
For example, the Department of Treasury is providing experts to the Ministry
of Finance to assist with development of tax legislation. Thirty U.S. experts
commented on aspects of the draft tax code. The Harvard Institute for International
Development (HIID) and others support the government coordinating committee
responsible for drafting the commercial law. By September 1995, the HIID team —
which includes a score of young Russian lawyers who are learning by doing —
drafted more than forty pieces of legislation, including securities law and joint stock
companies law.
In early 1993, USAID responded to a Russian government request for assistance
in drafting the civil code which will govern all market relations. IRIS (University of
Maryland Institute for Reform of the Informal Sector) has provided two of the
world’s leading experts on civil codes to comment on a translated version of the
Russian government draft and the University of Leyden, Netherlands, provided
experts who had drafted a relatively new Dutch code. They did this in the context of
workshops attended by those who drafted the Russian code and at which
parliamentarians were invited to observe the process and add their own views on
what might be problem areas. They also translated the U.S. Code into Russian. Part
I of the new Civil Code went into effect in January 1995 and Part II on March 1,
1996.19
With all the attention that health care receives in the media, most Americans
would understand the potential impact that health care reform might have on the
economy of Russia where every aspect of care was government supported. It remains
one of the largest sectors of the Russian budget, but the health care system provides
increasingly antiquated and inadequate care that has contributed to a dramatic decline
in life expectancy and aggravated social discontent.20 Because of its own numerous
ongoing experiments in alternative financing of health care, the United States is
particularly well-equipped to assist the Russians on this issue. In several parts of
Russia, U.S. contractors (Abt Associates) have established demonstration health care
facilities to test HMO-type systems from which Russian health experts are expected
to draw models for their own programs. At the same time U.S. experts are promoting
19 David Hoffman of The Washington Post called Part II, “perhaps the most important
Russian document of the last decade, even more significant than the 1993 constitution”
(March 1, 1996, page 1). Like much U.S. reporting of events in Russia, however, the article
makes no mention of the U.S. assistance program role.
20 See, for example, Murray Feshbach, Ecological Disaster, New York, 1995; “Plunging
Life Expectancy Puzzles Russia,” Washington Post, July 2, 1995.

CRS-17
a family practice preventative medicine approach previously unknown to Russia that
might improve quality of care. At the national level, USAID provides experts to
advise the Russian Health and Social Development Foundation, a think tank that has
acted as a resource on the issue of health care reform for the Duma, local level
officials, and GKI, the Government Privatization Agency and “owner” of health care
facilities in the country.
Housing is another sector that has powerful ramifications for the national and
local economy. Between 1992 and 1994, according to USAID, there was a fourfold
increase in private ownership of housing. USAID provided technical advice that
facilitated this outcome and the subsequent development of a land and real estate
market. USAID has been particularly successful in introducing models of
condominium ownership, private apartment housing maintenance, and real estate
information systems. At this stage, it is assisting the development of mortgage
lending programs in Russian banks (Urban Institute).
Institution-Building. U.S. assistance provides training as well as policy
advice to those Russian government institutions responsible for creating policies
affecting private sector development. The Commission on Securities and Stock
Markets, the Ministry of Finance, and the Central Bank are among institutions being
strengthened.
A range of private institutions that facilitate growth of the private sector are also
receiving assistance. Complementing development of securities legislation, a
number of efforts have encouraged the growth of a stock exchange. Apart from the
original U.S.-supported voucher privatization program that introduced the concept
of shares and public ownership, U.S. experts have advised the roughly 89-member
Moscow Brokers Association which is establishing trading rules and standards. They
also introduced a NASDAQ-like computerized trading system. One of the
beneficiaries of this system and perhaps a window into the new Russia, the brokerage
firm Troika Dialogue, grew from four employees to over 100 in two years; almost
all its employees are in their twenties.
Eight Business Service Centers (BSCs, Deloitte Touche) that provide targeted
assistance to individual businessmen also emphasize assistance to budding business
associations springing up around the country (77 assisted thus far). The BSC in
Novosibirsk provides computers for the use of members, seminars, and U.S. tours
geared to their interests. For example, it held a training course for 45 firms from six
cities in Siberia so that members could obtain a certificate allowing them to work
legally in the real estate profession. The certificate was previously available only
through training by a Moscow specialist who charged high prices. The BSCs also
helped set up the first national women’s business association; forty regional chapters
were subsequently established.
In addition to the BSCs, Virginia Polytech, the State University of New York
(SUNY), and Opportunity International, among others, have established “incubators”
that provide new businesses with space and equipment as well as consulting services.
It is hoped that both BSCs and incubators will become sustainable institutions in the
future.

CRS-18
The accounting consultant firm, KPMG, has set up two bank training centers in
Russia (Novosibirsk and Vladivostok) to educate mid-to-upper level managers in
credit analysis, small business credit, customer service and other topics not generally
associated with Russian banking. Local banks contribute to operations, and it is
hoped that eventually they will take them over entirely. In Novosibirsk, more than
500 bank staff have been trained. USAID housing efforts include assistance to the
Association of Mortgage Banks and the Association of Commercial Banks aimed at
increasing acceptance of mortgage lending practices.
In order to have a multiplier effect, the training of trainers or business
consultants is a common element of a number of projects. For example, the Morozov
project (SUNY) is a Russian-initiated effort to establish business schools throughout
the country to meet the growing demand for business-educated staff. Part of the
U.S.assistance effort is the training of teachers who will work at the more than 35
centers around the country — more than 1,600 have been trained to date. An effort
to set up a business counselor certification program (Washington State University)
in Siberia has spread to other regions of the country.
Business Support. An array of grassroots activities provides individualized
support to emerging small and medium businesses. While it can be argued that
systemic and institutional support affects larger numbers of firms, the individual
support has a more immediate payback both for the firm and as visible models of
success and progress for others in the community. As such, the projects make for
better public relations.
Individual firms cite credit as the assistance they most want, but USAID
officials argue, first, that most small Russian businesses have little sense of
accounting practices or marketing skills that would make credit work for them. U.S.
technical assistance and training are designed to respond to this need. Second, the
U.S. program has insufficient financial resources to provide a significant credit
program. The United States does, however, contribute to an EBRD-run
microenterprise loan program that leverages funds to encourage banks to set up a
small business loan window.
Although many discrete support activities were active in the first years of the
assistance program, the Business Service Centers and incubators noted above were
set up more recently as an instrument that would give some coherence to this effort,
often acting as a referral service to the other assistance programs available to Russian
businessmen. Large and medium firms, most recently privatized, are similarly
supported through the Regional Privatization Centers.
Among those providing support to business are volunteer organizations such as
the Citizens’ Democracy Corps (CDC) and the International Executive Service Corps
(IESC). Both offer individual businesses the services of highly experienced
volunteer U.S. experts for periods of usually less than six weeks. The CDC, for
example, was able to assist a dairy company in Western Siberia by bringing in the
founder of Dannon Yogurt and a new dental clinic by bringing in two American
dentists. These individual experts are often able to have a vital impact on the host
firm’s success and create positive connections between U.S. and Russian business.
Similar programs include those run by Volunteers in Overseas Cooperative

CRS-19
Assistance (VOCA) and Agricultural Cooperative Development International
(ACDI), which conduct volunteer programs directed at the food production and
marketing sector under the “farmer-to-farmer” program; the Center for Citizens
Initiatives which brings Russians to the United States for internships; and the
Financial Services Volunteer Corps, currently assisting the Russian Central Bank.
Promotion of a Democratic System in Russia
In the past year, some prominent observers have criticized the assistance
program for allocating insufficient funds to democratic reform activities.21 They
suggested that the objective of economic reform was being favored at its expense.
It is true that, very broadly defined, about 18% of Russia obligations through FY1995
have been dedicated to “democratic” initiatives and 73% went to facilitate
“economic” ones.22 But distinctions between the two categories are imprecise. It can
be argued that many of the activities that directly target business, housing, and health,
for instance, are also building democracy by empowering individuals and
associations. Further, efforts to promote economic policy reform are conducted in
a manner that fosters democratic cooperation between the Russian executive and
legislature.23 Helping to formulate commercial law contributes as much to the “rule
of law” (a so-called democratic initiative) as does efforts on behalf of criminal law.
Although not a reliable gauge at leadership levels, at the grassroots level, supporters
of economic reform probably overlap with those who support democratic institutions.
While there are also distinct limitations on the ability of the United States to
openly promote democracy in Russia without rubbing up against Russian nationalist
sensitivities and creating a backlash, a great many programs are currently being
implemented that might be called democracy-strengthening. Despite concerns
regarding the ability of Russian grassroots public interest organizations to absorb
large-scale assistance, many observers believe there is still room to increase many of
the activities described below, were funds available.24
21 For example, Michael McFaul, Why Russia’s Politics Matter, Foreign Affairs,
January/February 1995; Bill Bradley, Eurasia Letter: A Misguided Russia Policy, Foreign
Policy, Winter 1995-96. Several congressional staff and other speakers at the April 1995,
Woodrow Wilson Center conference on Western Aid to Eastern and Central Europe made
the point with direct reference to the former Soviet Union as well.
22 The broad definition of democratic activities includes exchanges, the Eurasia Foundation,
and the democratic initiatives program. Taken alone, the latter program would count for 5%
of obligations. Economic activities include the programs noted in the above section. Core
economic programs: the private sector and economic restructuring programs, and the
Enterprise Fund account for 38% of total assistance.
23 On at least two occasions, the Embassy and USAID insisted that the Russian executive
branch and parliament agree to formulate legislation together prior to receiving U.S.
legislative drafting and related assistance.
24 For instance, if assistance programs were demand-driven by recipients, one could easily
expand programs that provide small grants to NGOs. Each time ISAR holds a grant
competition, they get roughly 300 proposals (30-40 are selected); in FY1995, the Eurasia
Foundation received 1,390 proposals, of which 212 (15.3%) were funded.

CRS-20
Policy Reform. The rule of law is one of the basic tenets of democratic
systems. In addition to the drafting assistance for economic and commercial law,
USAID supports grantees and contractors facilitating development of non-economic
law. The American Bar Association (ABA) utilizes in-house experts and U.S.-based
volunteers to review and comment on draft laws, including a reformed criminal code
that was also facilitated by the U.S. Department of Justice. The International
Foundation for Electoral Systems (IFES) has assisted the analysis and legal drafting
of the electoral code adopted into law by the Russian parliament and also assists with
development of regional election laws.
Top and Bottom Institution-Building. While the executive branch of the
Russian government is strong, the counterweight institutions of democracy are not
strong. Efforts to help the Parliament draft legislation have the effect of
strengthening the role of Parliament vis-a-vis the President. Some projects attempt
to deal with reforming the institution itself. The Congressional Research Service
(CRS) has provided equipment and training to Parliamentary staff in the use of
information systems that might allow development of a more independent branch of
government.
KPMG leads an effort on fiscal reform to strengthen the ability of legislative
bodies — at the federal and oblast levels — to do budget analysis and revenue
estimation. This of course feeds back into economic reform. Understanding how
other countries finance highways, what kind of tax system to have, how to reform the
pension system, etc., helps oblasts to have more independence in dealing with their
own budgets.
Several U.S. organizations focus on improving the party and electoral systems.
The National Democratic Institute (NDI) and the International Republican Institute
(IRI) both work with national party officials, local government elected officials
(associations of mayors, etc.) and political activists in how to organize, how to work
with media, and how to do constituent services. While they take somewhat different
approaches and have worked in different parts of the country, they often work
cooperatively as well. IFES works closely with the Central Electoral Commission,
and helps develop training programs for poll watchers, elections officials, and others
involved with the electoral system.
Strengthening the judicial branch of government is another focus of U.S.
assistance. One of the earliest assistance projects, run largely by the ABA, was
designed to introduce the concept of jury trial into Russia. Previously, judges
determined a verdict and the role of the defense was limited. The pilot program
suggests that a more robust defense practice will be one added consequence. USAID
programs are also training judges and working to improve teaching materials in law
schools. One effort provided copies of the new civil code to every judge in the
country within days of its adoption.
Grassroots Democracy. Public civic education is a major thrust of IFES,
IRI, NDI, and other U.S. organizations. Political activism and civic advocacy are
encouraged through seminars, mock parliaments in the schools, production of voter
education manuals, and the like. USIA runs an extensive array of exchange programs
to introduce Russians of all ages and walks of life to the American democratic system

CRS-21
and people. Roughly 13,000 Russians were brought to the United States through
USIA-implemented programs in the period from FY1994 to FY1995.
One of the foundations of the American democratic system is the wealth of
grassroots charities, associations, public interest groups, and related non-
governmental organizations that provide services, exchange information, and work
to influence public policy. Such organizations were mostly unheard of during Soviet
rule, and one sign of the vast changes that began to occur with perestroika in the mid-
1980s was the emergence of citizens groups, most notably environmental ones. The
U.S. assistance program has sought to encourage the growth of these organizations
— now estimated at 30,000 — through training and small grants programs.
There are three major grassroots democracy projects at this time. Some training
is provided by all of them, usually through intermediary organizations, to help NGOs
learn the basics of grant proposal-writing, marketing, accounting, and the like, so that
they can make the best use of the small grants component of the projects and become
sustainable organizations.25 The Civic Initiatives program run by a consortium of
organizations headed by Save the Children emphasizes giving NGOs a voice in
public affairs. In addition to providing one-on-one advice and training to NGOs, it
works to increase the distribution of NGO information to the mass media and has
produced a television program explaining NGO roles in issues of concern to the
Russian public.
Since 1993, the Eurasia Foundation has provided more than 476 grants totalling
$14.3 million, mostly aimed at strengthening grassroots organizations (most grants
to Russian organizations are less than $20,000; the average joint grant through a U.S.
organization is $70,000). Two-thirds of the grants now are made directly to
indigenous groups. Grants might be used, for example, to train the organizations’
staff and volunteers, to facilitate networking between NGOs through conferences and
newsletters, or to build interactions with government, business, and the public. A
grant provided to a St. Petersburg publishing company (not an NGO, but the project
was non-profit) paid for the writing and production (10,000 copies) of a textbook on
democracy for high school students. A conference held in Ekaterinburg brought
together 120 NGOs with the city administration, oblast legislature, and business
community. Grants have also been made in different parts of the country to support
introduction of the “Junior Achievement” economics training program to young
Russians.
ISAR (formerly the Institute for Soviet-American Relations), highlighted in the
January 1995 CRS report for its computer networking of indigenous NIS
environmental NGOs, also provides small grants to such organizations. One example
is ECOJURIS, which provides pro bono environmental legal assistance to Russian
organizations and communities that seek to have environmental laws enforced. They
have helped, for instance, to represent some of those who participated in mitigating
the Chernobyl disaster and consequently suffered health problems. ECOJURIS has
25 In addition, a project run by World Learning that has created ties between Russian NGOs
and U.S. counterparts is winding down toward completion in 1996.

CRS-22
also run seminars to educate NGOs, government officials, and environmental
lawyers.
The development of an independent media in Russia, where formerly the state
controlled all news and information, is another important democratic initiative. A
number of Eurasia Foundation grants go to develop journalistic skills, USIA runs
exchanges aimed at Russian journalists, and the Russia-America Media Partnership
Program links U.S. and Russian print and television entities to meet specific needs
of the independent news media. The most consequential U.S. media program to date
has been the effort of Internews to train independent TV producers and managers
throughout Russia. One of these, Channel 4 in Ekaterinburg, benefitted extensively
from Internews assistance, having gone from five employees transmitting for ten to
fifteen minutes each day in 1991 to about 200 employees broadcasting on two
channels nearly 24 hours each day. It was Channel 4 that broke through the
government’s information blockade on the war in Chechnya and disseminated
information on war dead to public groups in Russia.
Issues for Congress
The assistance program in Russia has been working in high gear for almost two
years now. All of the serious implementation concerns raised by Congress during the
first few years of the program are being addressed. While the program may never
satisfy critics, it appears to be effectively contributing to key U.S. foreign policy
objectives as set forth by Congress in the FREEDOM Support Act.
In the past year, Congress has focused considerable criticism on policy decisions
of the Russian government, especially the military effort to put down the Chechnya
secession movement and the plan to sell nuclear power plant technology to Iran. The
negative mood regarding Russian behavior during consideration of the FY1996 bill
contributed to adoption of language in the House that would have placed a $195
million cap on assistance to Russia, a significant decrease from previous years.
Although the final bill eliminated this cap, it contains earmarks for countries other
than Russia that leave fewer funds available to Russia than the House cap.
Congress, of course, often expresses its views and priorities through its power
over the appropriations process. Concerns regarding what was perceived by some
influential Members as a too-strong emphasis on Russia relative to other NIS
countries — especially arising from the FY1993/FY1994 $2.2 billion appropriation,
much of which was intended for Russia — had earlier led Congress to introduce
country earmarks to the NIS account. Earmarking by sector and project is not
unusual, and both practices grew markedly in the FY1996 bill.
It is likely that issues will continue to arise that will lead Members of Congress
to seek to limit funds to Russia.26 While such cuts may seek to punish the Russian
26 The Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996 (H.R. 927), signed
into law on March 12, 1996, reduces assistance to any country by the amount of aid it
(continued...)

CRS-23
government or register U.S. dissatisfaction with events in Russia, they will also have
consequences for the beneficiaries of U.S. assistance and the foreign policy
objectives that the assistance program has been trying to meet. Further, the
Administration has contended since 1994 that the technical assistance program for
Russia would end with the FY1998 appropriations. But this raises the question of
what kind of relationship the United States may seek with Russia after the year 2000
when these funds will be exhausted. These issues are discussed below.
Impact of Budget Cuts
The level of funding available for Russia has fallen substantially during the past
two years. The amount the Administration sought for FY1995 was $385.5 million;
in the end $340.7 million was allocated. For FY1996, the Administration requested
$260 million; the Russia program is now expected to receive roughly $168 million.27
This means that most of the current programs are living off of the singular surge in
funding that occurred in FY1994 when $1.3 billion was made available to fund
Russia activities. It is expected that most of that money will be exhausted by mid-
1996.
The consequences of these cuts are manifold. It appears that new activities are
not being initiated, many existing programs will soon be terminated and the rest will
be reduced. For example, USAID already has ended new involvements in
agriculture. It expects to end its pharmaceutical security and health information
programs when current funding lapses. It will terminate post-privatization assistance
to individual firms, and reduce support for land and capital markets, new business
development, and policy, legal, and regulatory reform. USAID also anticipates that
rule of law activities, including support for the judicial system, will be cut. Support
for new NGOs and exchanges and training are likely to be reduced. The housing
reform program will also be cut substantially from the original FY1996 proposed
level. The only proposed increase for FY1996 appears to be in the area of financial
sector reform, although at lower levels than anticipated by USAID.
There is some logic to the USAID choice of targets for reductions. Some
USAID and State officials have indicated that, as much as possible, they believe that
26 (...continued)
provides in support of intelligence facilities in Cuba or in support of the Cuban nuclear
facility at Juaragua. However, the President may waive the former provision and neither
applies to certain categories of assistance, including democratization, the development of
a free market economy, the grassroots private sector, and secondary school exchanges.
27 Although the Administration request for the NIS account was $788 million for FY1996,
its request for the whole NIS was, in actuality, more than $936 million, as it sought to curtail
the practice of funding the activities of many U.S. government agencies out of the Foreign
Operations account by having the agencies request funds for their NIS programs out of their
own budgets. As all these other agencies, especially USIA and Commerce, were ultimately
cut in FY1996, it is doubtful that their funds will be used for the NIS. In the case of the
Energy Department, however, the Administration’s $23.1 million request for nuclear reactor
safety was cut to $7.7 million. The shortfall will be made up by the NIS account. House
and Senate reports both supported continued funding of Peace Corps activities through the
NIS account.

CRS-24
projects which do not directly support democratic and economic reform should be
eliminated first. Not everyone, including those at State, would agree with USAID’s
priorities however. Congressional sector and project earmarks and support for such
programs as hospital partnerships and exchanges and the Vice-President’s personal
support for environmental programs, for instance, might protect those programs.
This would force USAID and State to cut other programs which one or both might
consider more essential to meeting key U.S. objectives.28
In one case an earlier funding commitment could severely constrain flexibility
of the Russia program. The two predecessors to the U.S.-Russia Investment Fund,
established when there were plenty of funds available, were both slow to get
investments off the ground. Of the total $440 million capitalization for the combined
funds, only $90 million had been committed by January 1996. The so-called
mortgage — capitalization amount still “owed” the Fund — is $280 million.
Although there is an understanding that the Administration will supply the needed
amounts as the Fund makes investments, if promised monies were to be paid out
between now and FY1998, there would be little left for other Russia activities.
USAID has suggested that the Fund change its practices and become a guarantor as
well as a supplier of equity, allowing the U.S. government to appropriate less for the
Fund — the subsidy amount — and still meet the earlier commitment.
But there are other, broader, consequences resulting from greatly reduced
funding. Progress in some U.S. projects has been stymied by a lack of identifiable
reformers, some of whom are still emerging. Now, as Russians in the energy sector,
for example, have become interested in undertaking restructuring and privatization,
cuts prevent large-scale help. USAID will stop its oil and gas activities and focus on
electrical generation. It will work in two regions rather than the four planned, and
will get companies in the electric sector to pay for some assistance themselves.
Cuts also have an impact on the relationship between Russians and the United
States. For many Russians, the program is viewed as a statement of U.S.-Russian
cooperation and goodwill. They may see the contraction of the program as somewhat
threatening to that new relationship that began with the end of the Cold War.
Reformers — be they federal or local government officials or fledgling businessmen
— likely will see it as a loss of support for their actions. The transition is far from
over. Important reformist legislation is still being formulated, critical decisions
regarding major sectors such as health, housing, land, and energy are still being
28 28 There are many examples of programs disparaged by USAID and State officers as “not
useful” to key U.S. policy objectives. One is the Title VIII program which funds U.S.
academic research on the NIS, continued funding for which was recommended by both
House and Senate Appropriations Committees in their FY1996 funding bill (the Senate
suggested at least $7.5 million). Another is the new Transcaucasus Enterprise Fund, $15
million for which was provided in the FY1996 bill. As other enterprise funds have taken
more than a year before the first investments are made, some observers have asked if most
of this money could not be better utilized elsewhere. A third example is the $20 million
intended for hospital partnerships and infectious diseases in the FY1996 bill, which, like the
often-cited FY1995 $15 million for family planning, supports benign and useful activities.
However, these are not viewed by many of those interviewed for this paper as the top
priorities of a program no longer flush with funds.

CRS-25
formulated, the NGO community is still in its infancy. The assistance program at
least opened Russians ears to American advice and counsel on these issues, and
created linkages between American specialists and Russians that could lead to future
cooperation. Though Russia’s transition will likely continue, there are those who
argue that to disengage abruptly might have severe consequences, for Russia’s future,
and U.S.-Russian relations.

The budget cuts in the Russia program have left the Administration with some
choices regarding priorities. Within congressional project earmarks, it must decide
what programs contribute most toward foreign policy objectives. Ultimately, the
trend is to end the whole program sooner than expected, so USAID officials are
seeking to phase the program out in the most efficient manner. This means finding
ways to hand projects over to World Bank or other donor funding where possible, to
end participation with the least alienation of Russian counterparts, and to finalize
projects where goals might be near completion.29
The cuts force the Administration to choose its policy priorities, and they raise
two issues for Congress as well regarding the immediate future. First, are funding
levels for the Russia program sufficient to meet the objectives, set by Congress, of
facilitating the economic and political transition of Russia? Whether the decline in
funding is a consequence of budget priorities or an expression of discouragement
with the Russian government, it seems clear that Congress is downsizing the program
for reasons not directly related to whether the core objectives are being achieved.
Second, are the broad policy parameters established by Congress in the
authorizing language of the FREEDOM Support Act being served or frustrated by the
inclusion of earmarks in appropriations language? The FY1996 appropriations
debate suggests some disparity of views here. While the House Foreign Operations
Appropriations bill contained few earmarks (the only country earmark — a $195
million ceiling for Russia — was added on the floor), the Senate bill contained many
funding directives, most of which were adopted by the conference report. In
deliberating the FY1997 budget, Congress will again have to decide how much
flexibility to give the Administration in determining how to meet priorities and how
much to specify in country allocations and projects.
29 To stretch U.S. funds, USAID and the NIS Coordinator have considered seeking a share
of project costs from the beneficiaries. The Russian government sometimes provides office
space and other services to U.S. technical advisers. The Coordinator now requires that new
projects contain an element of cost sharing. Some USAID projects are seeking to charge
beneficiaries for services so that they may continue to exist after U.S. government funding
disappears. However, these programs have not been in existence very long and, in Russia’s
precarious economic environment, a paying clientele sufficient to make these programs
independently viable may not yet have developed. USAID officials expect that the Business
Support Centers in active commercial locales such as Petersburg, Ekaterinburg, and
Vladivostok will be able to recover 40% of their local costs this year. The Bankers Training
Program requires participating banks to contribute $20,000. Nevertheless, it may end up
short of the number of shareholder banks it needs to sustain its operations when U.S.
funding ends in mid-1996.

CRS-26
What Kind of Program after FY1998?
Although the Administration did not anticipate the dramatic cuts in funding
levels that Congress imposed subsequent to the FY1994 appropriations surge, it has
maintained since 1994 that FY1998 would be the last year it would seek “economic
transition” funds, i.e., the technical assistance program would end by the year 2000.30
No one would suggest that this means U.S. objectives in Russia will be fully met by
then or that there will no longer be a role for some of the activities currently being
funded out of the NIS account. The United States will continue to have interests in
Russia for decades to come as it has in decades past. The question asked now in
State Department and other circles is — what will U.S. interests be after FY1998 and
what kind of activities would support those interests that the United States will wish
to fund? This discussion regarding the “baseline program” is just beginning, but is
likely to be joined by Members of Congress in the near future.
The appeal of declaring an end date to U.S. assistance in Russia
notwithstanding, some would argue that efforts to encourage democracy and free
markets — even at greatly reduced funding levels — should be continued after
FY1998. However, trying to define a baseline program for Russia highlights the fact
that the program has not been solely about democracy and free markets. There is
another, longer term foreign policy objective — cooperation.
Currently, the United States has a variety of cooperation programs that it
conducts with other countries, including those in Western Europe. While many of
these are funded from State Department and USIA appropriations, others —
scientific and technical exchanges for instance — are conducted out of individual
agency budgets. Few of these have been considered foreign aid. Several elements
of the current NIS account, including the USIA exchange programs, are similarly
aimed at goodwill and cooperation.
Many of the Russia assistance program efforts have had the effect of
establishing cooperative ties that the United States might or might not wish to
continue after the assistance program has effectively ended. Whereas the United
States had somewhat restricted relations with non-central government entities in the
Soviet Union, the assistance program for Russia has opened doors to local
governments, citizens groups, scientific and business organizations and the like
throughout the country. Some would argue that maintaining relations with these
groups is in the long-term interest of the United States.
The importance of such relations to U.S. long-range interests may be heightened
by the fact that the Russian road to democracy and a free market economy is not
going to be smooth. Nor, even as these objectives are met, is it at all guaranteed that
U.S.-Russian relations will be warm and friendly.
30 This was more likely an effort to convince Congress that the program was limited in cost
and would not go on forever rather than based on a rigorous analysis of what it would take
to accomplish U.S. objectives.

CRS-27
The baseline program would ideally derive from a serious evaluation of the
possibilities and permutations of future U.S.-Russian relations and a weighing of the
uses of U.S. assistance funds for their value in shaping that future. Still in an early
stage of formulation, baseline program proposals from officials at State, the Embassy
in Moscow, and USAID currently share some common features. There is general
agreement among these executive branch participants that total annual funding for
Russia should be in the $50 million to $100 million range in the post FY1998 era.
The thinking appears to be that this range may be acceptable to Congress in budget
terms; it may not be a reflection of a critical estimate of U.S. objectives. There is
some agreement that the baseline program should include exchanges, trade and
investment activities (TDA, OPIC, and Eximbank), and a variety of grassroots
volunteer activities. Some suggest that nuclear reactor safety and Nunn-Lugar non-
proliferation activities are also both strongly in the U.S. national interest and should
be maintained.
The Administration has not sought from Congress its thoughts and approval of
a baseline program. With the FY1997 foreign aid request that will be presented in
the near future and debated in the coming months, Congress will have the
opportunity to address both the future of the U.S. foreign assistance program in
Russia as well as the longer term character of U.S.-Russian relations.31
31 As this report went to press, the Administration issued its FY1997 international affairs
budget request. With the NIS request straightlined at the FY1996 level, the request for
Russia is $173 million (versus an estimated $168 million in FY1996).

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