(Pressley urges repeal of aid limits for Azerbaijan) (7310)
Washington -- The Clinton administration says it is time to repeal legislation that has banned most U.S. foreign assistance to Azerbaijan because of its conflict with Nagorno-Karabakh.
Donald Pressley, acting assistant administrator for Europe and the Newly Independent States (NIS) at the U.S. Agency for International Development, says that there is no acute humanitarian crisis currently in Nagorno-Karabakh, but that the Section 907 congressional restrictions on Azerbaijan prevents vital foreign assistance from furthering democratic and economic reforms in the region.
Pressley made the remarks March 26 in testimony before the U.S. House of Representatives Committee on International Relations.
"Section 907 of the FREEDOM Support Act prevents much more than humanitarian assistance, democracy-building activities, training and exchanges, and modest assistance" to non-government organizations (NGOs), Pressley said. "Over time the inability of the United States to provide structural assistance will prove even more unfortunate. Authoritarianism and corruption have the potential for stalling economic reform at the very moment when oil revenues could have a salutary long-term effect on overall prosperity. The means to overcome poverty exists, but sound policies to absorb and reinvest oil proceeds to modernize agriculture and industry for a more diversified economy are not readily apparent."
As long as Section 907 remains in effect, Pressley continued, "any opportunity we might have to promote economic policies to ensure equitable access by the neglected rural population to the benefits of energy-induced economic growth is also circumscribed. In effect, billions of dollars will pour into Azerbaijan from American investors, but we can do almost nothing early on to mitigate their risk by promoting contract law, regulatory reform, and other aspects of transparent governance."
Pressley's testimony outlines foreign assistance efforts in each of the NIS regions.
Following is the text of his testimony as prepared for delivery:
(Note: In the text "billion" equals 1,000 million.)
Mr. Chairman, thank you very much for the opportunity to appear before the Committee this morning.
Mr. Chairman, the FREEDOM Support Act, authored by this Committee, governs assistance to the former Soviet Union and has made the United State a partner in one of history's greatest political transformations. The former Soviet Union, our old ideological and military foe, dissolved into 12 nations (plus the three Baltic nations), some of which have little historical precedent as independent states at all and others of which have been subsumed for nearly a century. An empire lost, a collapsed economy, a discredited ideology and wary citizens in search of freedom and security were the staggering problems facing the New Independent States (NIS) of the former Soviet Union. The FREEDOM Support Act became our own blueprint for serving as advisor and ally in their revolutionary transformation to market democracies.
The importance of our role in the transition and the enormity of the tasks yet to be accomplished have resulted in our request of $925 million in FY 1999 -- a 20 percent increase over last year's budget of $770 million. From the FY 1994 peak of $2.4 billion, FREEDOM Support Act funds declined to $850 million in FY 1995, to $641 million in FY 1996 and $625 million in FY 1997. This downward trend was reversed in the current fiscal year (going back up to $770 million) because Congress recognized both the progress to date and the unmet needs still facing the region.
We are asking for an opportunity to continue and to augment this American -- NIS partnership for three reasons, in particular:
-- First, the stakes remain as high today as they were in 1991 when the Soviet Union collapsed. Worldwide economic stability, military security and arms control, responsible management of highly prized natural resources, and reversing endemic environmental degradation -- are no less critical today than in Soviet times, but more countries and more actors exist today with whom we must interact. The problems are more diffuse and, therefore, harder to contain. The FREEDOM Support Act is an imaginative blueprint for the West to use in engaging with these new nations. Our ultimate interest lies in these former Soviet states' electing to join the West in vibrant economic and political interactions, thus avoiding the isolation and brinkmanship of the past.
-- Second, these 12 newly independent states are still at "odds with themselves" as Fred Hiatt recently observed in the Washington Post. They are fluctuating between modernism and authoritarianism -- they want to regain wealth and prestige but are still unwilling to fully abandon all-too-familiar Soviet-era leaders and institutions. This means to us that more rather than diminished contact with the United States and other Western nations is desirable as they struggle with difficult reforms.
-- Third, the United States is embarking on the second-generation of assistance, the Partnership for Freedom. The Partnership is intended to deepen and make more enduring the values and benefits of transitions to a market economy and governance by democratic institutions by reaching beyond central governments to localities and oblasts and voters where decisions about the validity of reform are as yet unformulated.
It has not even been ten years since the Berlin Wall fell; the Soviet Union dissolved only seven years ago. The mood was euphoric, and the will to engage effectively and quickly was palpable. We could not be certain of the full consequences of the unfolding drama, but the newly independent countries of Central and Eastern Europe and the former Soviet Union accepted our assistance to begin a transition from a command to a market economy and from totalitarianism to democracy. And, USAID tried to provide the basics, using a mix of technical assistance, exchanges, and partnerships.
With respect to the transition to a market economy, USAID provided help so that nations could: put state-owned and -operated enterprises into private hands; restructure newly privatized enterprises; foster small business creation; redefine the role of the central bank and reform the banking system; create stock markets, commodity exchanges and the corollary regulatory systems; codify property laws, land titling and the protection of new rights to own property; establish bankruptcy procedures, contract law and a legal system to enforce and uphold new laws; and finally, to garner acceptance of difficult macroeconomic policies that are a prerequisite for economic stability if not immediate prosperity.
With respect to democratic reform, we also funded programs to: write new constitutions; create a hospitable climate for the formulation of a wellspring of political parties, non-governmental organizations, interest groups, think tanks, professional associations, which contribute to a vibrant civil society; train justices to oversee a new society predicated on rule of law; offer both the technology and the wherewithal to sustain free speech and unrestrained media; and, finally, to fashion election laws to make elections free, fair and meaningful.
Thus, in a remarkably short span of time, transitions of great magnitude began to occur. Change has not always been comfortable, uniformly or readily embraced, or dutifully enforced, but societies have indeed transformed themselves with the United States a willing and abiding partner. I am eager to list a few milestones in this difficult transition process, progress that many of these countries have achieved quickly and against considerable odds.
-- Economic restructuring of such massive size entails significant contraction of economic output. For the NIS overall, this contraction seems to be thing of the past. 1997 is the first transition year of economic expansion for the NIS as a whole. Russia's economy expanded by 1 per cent. Three NIS countries, Georgia, Armenia and Kyrgyzstan, have now experienced robust, sustained growth for three years or more.
-- Inflation provides a revealing link to progress in implementing the difficult, yet necessary economic transition reforms. Moreover, inflation reduction is an important precursor to sustained economic growth. Progress in reducing inflation in the NIS has been remarkable: from over 3000 percent annual inflation in 1993 to 22 percent in 1997. In the period 1996-1997 performance in the NIS exceeded inflation-reduction performance in the Southern tier of Central and Eastern Europe and approached the Northern tier.
-- Substantial economic restructuring is also evident in the dramatic shift in trade patterns in the NIS. In particular, trade with the West is now far more important than in pre-transition days and trade between the NIS countries counts for less. From 1990 to 1995, NIS trade with the rest of the world increased roughly from 8 percent of regional GDP to 13 percent, while trade between the NIS in this period decreased from 20 percent of GDP to roughly 5 percent. This dramatic shift means that economic activity is increasingly dictated by markets and comparative advantage, and from that efficiency gains on old, static trade patterns and economic welfare ultimately accrues.
However, as effective as reform has been, unalloyed success still eludes the NIS. The breakdown of the old order did not make instantaneous democrats of everyone holding power. Post communist institutions had to be grafted onto old communist institutions; and, reformers, democrats, unreconstructed communists, savory and unsavory businessmen, new and old bureaucrats, Western-educated and Marxist-educated have had to coexist. This makes it difficult to arrive at consensus on rule of law, transparency in governance, respect for individual rights and private property rights, social sector restructuring, fair and responsible taxation, orderly fiscal federalism, and other matters demanding sustained political courage.
In addition, the twelve NIS countries that were once a part of the Soviet Union are having vastly different rates of success in coping with their freedom. The Soviet system left a terrible legacy that is not easily undone: by controlling trade patterns from Moscow, they prevented economic self-sufficiency within a republic; they experimented with mass migrations of people, cruelly dislocating them from their homelands; some republics were isolated from the West; and there was a wholesale disregard for environmental travesties. The Soviet system left the individual republics with staggering difficulties that will take generations to overcome.
A number of scholars have made the argument that the near-success electorally of communists and ultranationalist candidates in parliamentary and presidential elections in Russia was attributable more to disillusionment with reforms that had not reversed poor economic conditions than to outright nostalgia or a renewed taste for imperialism. If a third or more of the population in Russia is suffering deprivation, the pursuit of additional reform is tempered. Therefore, it has been our joint desire to refine American assistance in order to reach citizens beyond the center, beyond the capital cities, to respond to ambivalence about reform by making the benefits more tangible to a wider array of people. It is not enough to put in place the foundations for economic growth -- which has been a centerpiece of U.S. assistance -- unless the NIS countries can follow it up by removing obstacles to and offering actual stimulants for investment, spreading investment capital to a wide network of businesses nationwide, and developing an entrepreneurial class. Thus, to reach a greater number of people in a wider array of locations, we developed the Partnership for Freedom.
The Partnership for Freedom is a refinement of previous reform programs plus a creative response to circumstances and possibilities now presenting themselves in the NIS. The NIS has not been as successful in transforming as the northern tier countries of Central and Eastern Europe and, in part, this is due to longer and deeper isolation from the West. This, plus our interest in fostering a pro-Western disposition and an enthusiasm for economic and social integration with the West, makes people-to-people contacts on a positive plane key to future U.S.-NIS relations. The Partnership is intended to:
-- place greater emphasis where feasible on economic growth and investment and to do so on a decentralized basis;
-- transcend the more traditional donor-to-recipient relationship by creating partnerships and exchanges between American and NIS institutions that are more equitable and likely to endure beyond the life of the FREEDOM Support Act;
-- capitalize on progress thus far in institutional reform and target technical assistance more rigorously where the need is greatest, particularly to NIS countries lagging behind Russia in adopting reforms;
-- recognize the value added of other donors in continuing assistance in privatization, macroeconomic policy and other facets of structural reform;
-- focus at the grassroots level where transforming societies are just beginning to experiment with their newly discovered freedoms.
Partnership for Freedom activities in FY 1999 are budgeted at $510 million. This is an increase of approximately 60 percent compared to FY 1998. Some important Partnership for Freedom programs, emblematic of our attempt to reduce trade and investment barriers, create constructive partnerships and encourage richer and more dynamic civil societies include:
-- Health and Hospital Partnerships. Central governments in the region have devolved certain rights and responsibilities for health care to regional and municipal governments. Thus, by using exchanges, training, technical assistance, internships, communications and information support, and commodity support, we intend to build on and expand existing partnerships between American and NIS institutions to foster effective and efficient delivery of health services on a community basis. We will do this throughout the NIS.
-- Environmental Partnerships. Building on earlier environmental assistance efforts that have focused on establishing legal, policy and regulatory frameworks and on building institutional capacities to manage environmental resources, the Environmental Partnership Program will focus primarily on increasing environmentally-related trade and investment flows between the U.S. and the region, thereby benefitting American businesses as well. In addition, this new Partnership Program represents a shift from traditional technical assistance, fully funded from USG grant resources, to a partnership mode in which USAID funds leverage other resources (including private sources) and whereby USAID's role is to bring together environmental professionals who will enter into lasting relationships beyond our direct involvement.
-- Energy Partnerships. USAID's energy partnership program has evolved from one in which U.S. electric and gas companies work with their counterpart companies to address basic issues of operating a utility in a market economy to one that also includes U.S. energy regulatory organizations at both the federal and state levels. One major area of interest is Russia's Federal Energy Commission and the growing interest of American companies in investing in Russia, given President Yeltsin's vision for a competitive and financially viable power market. In 1998, we are planning additional partnerships in Ukraine and Armenia plus we hope to link environmental partnerships to companies involved in Caspian energy exploration.
-- U.S.-Russia Presidential Management Training Initiative. The United States, in response to President Yeltsin's own request, is expanding training for young Russian managers in modern management techniques and technology. Using a number of approaches, including MBA programs at U.S. business schools, internships in U.S. companies and communities, U.S. business faculty placed in Russian business schools, in-country and U.S.-based training, our goal is to offer training directly to individuals as well as strengthen Russian business and law schools. So seriously does Russia take this program, cost sharing by the Russians and the U.S. partners will be a key feature of this initiative.
-- Development Credit Authority. Last year, USAID was provided with expanded authority to offer credit assistance, including direct loans or loan guarantees. While this is a worldwide authority, we believe there is a particular opportunity to implement a guarantee program in the NIS, initially in the Russian Far East. We are looking at other countries as well. In order to get investment capital throughout the country, the concept involves using Russian local banks and American banks in the region for lending in specific sectors, notably energy, telecommunications and infrastructure, particularly in Far Eastern ports.
-- Regional Investment Initiative. As a practical matter, the regional investment initiative is a mechanism for mobilizing capital in selected, reform-minded regions so that the demand for growth and dissolution of impediments to investment occurs at the grass-roots level. Lack of access to capital outside major cities constrains growth but access to capital in turn stimulates an interest in sound banking, in mortgage lending, reasonable tax policy, small business credits, etc. Thus, under the Partnership for Freedom rubric, this initiative will direct additional resources to programs that can respond to the need for capital in the small business sector in a variety of ways, simultaneously adding sister city partnerships, Eurasia Foundations grants, civil society building capacity so there is a certain synergy between flow of capital and institution building.
The FY 1999 budget request, specifically the $155 million increase above the FY 1998 level, will make it possible for the United States to meet the following objectives:
-- expand Partnership for Freedom initiatives principally in Russia at the outset, but ultimately throughout the NIS over time.
-- expand the Presidential Management Training Initiative.
-- strengthen our efforts in Central Asia where foreign investment in extractive industries is outpacing the legal and regulatory environments and where corruption and authoritarianism are dampening the region's bright future.
-- permit increased attention to infectious diseases and other health concerns, including TB, especially in Central Asia, Caucasus and Ukraine.
-- fund reforms to promote energy restructuring, energy efficiency and other policies in response to the President Is Global Climate Change Initiative as well as to help revitalize this key sector of the region Is economy. Based on high levels of greenhouse gas emissions, USAID has designated Russia, Ukraine and -- as a region -- the Central Asian Republics to focus our efforts.
Let me now proceed to describe some of the challenges and concerns pertaining to specific areas within the NIS. Again, our ultimate goal in all of these countries is to implement programs under a Partnership for Freedom rubric, but as reform varies from country-to-country, the process will evolve and will be tailored to the opportunities countries offer for a partnership relationship.
Western NIS: Belarus, Moldova and Ukraine
Belarus and Moldova -- combined with Ukraine -- form the Western NIS region. These two small countries are polar opposites: Moldova warmly embracing reform and Belarus rebuffing it. Belarus is engaged in a dogged quest for return to Soviet style authoritarianism, using suppression and extra-legal means to get there. In this difficult environment, the United States can do little more than fund small scale privatization and offer modest assistance to NGOs, the independent media, and individuals who act as counterpoints to excessive government controls.
Conversely, Moldova ratified its post-Communist constitution by 1994, introduced a new currency, and held parliamentary and Presidential elections, and now regards economic reform as the greatest hope for national prosperity and stability. Despite the fighting in the Transdniester, Moldova sought to build an open political system which provides for the democratic airing of views, and which has produced free and fair presidential and parliamentary elections for three years running. Moldova is viewed as a model for an integrated approach to market reform. Macroeconomic stabilization and mass privatization of industry have been the cornerstones of reform, and have been accompanied by the elimination of price controls and the liberalization of the trade regime. As a result, inflation has fallen to approximately 10 percent in 1997 compared to 330 percent in 1994. Now, Moldova, still finding economic growth elusive, is implementing, with USAID assistance, a coordinated approach to eliminating remaining constraints on economic growth: hastening land privatization and titling; restructuring privatized industry; seeking agribusiness investment, and modernizing energy usage and rationalizing tax policy.
Elections were held in Moldova earlier this week and we will need to monitor positions taken by the new government. We remain hopeful that the path of reform is viewed as the only viable route by this new Parliament, much as the previous Parliament saw reform.
Ukraine has understandably commanded the attention and the resources of Europe, the United States and international financial institutions. This is attributable to its size -- fifty-two million people in a country the size of France; its strategic placement between Russia and Central Europe; its large agricultural base and extensive natural resources; its nuclear capabilities plus the ravages of the Chernobyl nuclear facility; and Ukraine's own struggle to satisfy economic and security interests by turning westward while preserving a fruitful and peaceful relationship with Russia despite historical strains.
Unfortunately, reform has been badly strained, with positive, pro-reform rhetoric by Ukraine's leaders outpacing actual implementation. The social costs have been severe with the cost of living continuously exceeding the means of average citizens; absent social sector restructuring, 54 percent of the population falls below the poverty level without an effective social safety net.
Because of the importance of Ukraine, as affirmed by the Administration and the Congress, we are persevering in promoting reform and there are some successes.
For the foreseeable future, Ukraine will continue to face serious economic and social problems, with increasing pressure to improve conditions for its people. The country's financial crisis makes reform all the more critical, as gaining access to IMF resources becomes Ukraine's best option to meet its financing gap. Over the summer and into the fall, Ukraine will have a window of opportunity between Parliamentary and Presidential elections to implement reforms, so our support in key sectors during that time will be particularly important.
Progress on the road to a market-oriented economy has been uneven. While Ukraine has had notable successes in such areas as privatization, adoption of international accounting standards, cost recovery, regulation of capital markets, land titling, and targeted housing subsidies, reform has lagged in a number of key areas, such as agriculture, energy, business and investment environment, and social sector reform.
There have been promising developments in efforts to privatize grain industry enterprises. Just last week a new order was issued that will accelerate the privatization of grain industry enterprises by regional authorities. It is now expected that 450 grain industry enterprises will begin share sales by September 30, and that 100 of these enterprises, or 70 percent, will be sold by that time.
For FY 1999, we plan to continue a primary emphasis on technical assistance to help Ukraine implement basic economic and political restructuring, and to continue closely coordinating our programs with those of the IMF, World Bank and other donors. Implementation depends on the Government of Ukraine's putting into action the policy and regulatory reforms to which it has voiced its commitment. It also depends on Ukrainian action at the central and regional levels to treat foreign and domestic investment fairly.
Negotiations with the IMF for a 3-year, $2 to $3 billion Extended Fund Facility have resumed. With respect to the IMF, conditionality is likely to be focussed in a few areas key to macroeconomic stability such as fiscal, banking and public administration reform, and possibly agriculture and energy. In each area, USAID technical assistance is a key component. World Bank loans will also be subject to conditionality in the relevant sector.
Halting progress at the level of the central government in responding to our assistance has prompted us to turn increasingly to grassroots efforts and partnership arrangements as a means of actively pursuing reforms. We have enjoyed some success in working at the local government level, and in helping establish partnerships between U.S. and Ukrainian entities. For example:
-- The success of utilities partnerships in delivering the best of America's expertise in technical and commercial operation in the power sector has convinced us to expand this program. Three U.S. firms -- Pennsylvania Power and Light, Otter Tail Power, and Kentucky Power -- have made substantial headway with their Ukrainian partners in implementing reforms in metering, billing, collections, business orientation and preparation for privatization.
-- While the government has made little movement on agriculture reform, USAID's Agricultural Partnership program has sparked Ukraine's transition to private sector agriculture. Private investment in Ukraine's input distribution continues to increase, with the private sector now the major source of most inputs. Under the partnership program, the U.S. supports joint U.S.-Ukrainian ventures, including farm service centers, agroprocessing facilities and other agribusinesses, which contribute at least 2.5 times the USAID grant. With ten joint ventures in operation and twenty more planned, the U.S. is adding a private farm commercialization component to insure that private farmers are actively participating with the agribusiness partnerships.
-- The success of USAID's five medical partnerships has led the Ministry of Health to adopt national initiatives in infection control, neonatology, and emergency care. This program also has helped decrease mortality and morbidity rates for adults and children, reduce hospital stays and advance teaching and medical techniques for health care providers. The most successful interventions, including Neonatal Training Centers, Emergency Medical Service Training Centers, Infection Control Initiatives, Nurses Training Centers, and improved health administration, will be replicated over the next year. New initiatives include development of three community-based screening programs for early breast cancer detection and improved survival; establishment of three comprehensive women's health clinics; broadening the scope of the partnerships to emphasize "healthy communities" a more comprehensive and prevention-oriented view of health; working with medical schools to diversify and update curricula; health promotion campaigns targeting high impact public health issues; and working with local NGOs to disseminate messages regarding such health threats as alcohol abuse, smoking, poor nutrition, and unsafe sexual practices.
-- The City of Lviv in Western Ukraine is the site of a focused approach based on regional priorities and Partnership for Freedom objectives. The Lviv Regional Development Initiative looks to expand and enhance community-based efforts directed at fostering capital formation and trade and investment, as well as promoting democracy and strengthening civil society. At the same time, this initiative establishes the U.S.-Ukrainian linkages that will sustain accomplishments into the future.
In addition to encouraging partnerships with Americans, the U.S. also is fostering closer ties between Ukraine and its Eastern European neighbors. The U.S.-sponsored Poland-Ukraine Cooperation Initiative, now in development, will help ensure that Ukraine benefits from Poland's successful transition experiences, initially in small business development. We expect that this initiative will expand to other areas in the future, and that it will lead the way for a larger region-wide "lessons across borders" sharing of Central Europe's and NIS countries, development successes.
No one knows more about the difficult business and investment climate in Ukraine than U.S. firms seeking to do business there. Ukraine simply cannot attract the investment it wants and needs for economic growth without bringing major change to its laws, regulations, and mindset about the conduct of business within its borders. This is a major impediment that will have to be resolved if Ukraine is to succeed in its transition to a market economy. We are working closely with the Ukrainians on several fronts -- to help them enact and implement laws and regulations that will facilitate business and investment by creating predictable, transparent systems; to empower people to become entrepreneurs and to change the system from within; and to encourage resolution of disputes involving U.S. investors. By the end of April, the Administration will need to decide whether there has been sufficient progress on these business disputes to justify a full-scale technical assistance program. Should we not be able to make a positive certification (and as a result forego half of Ukraine's assistance budget), we would have to look carefully to determine what can reasonably be achieved in Ukraine's current policy environment and revamp our assistance program accordingly.
Caucasus
The Caucasus consists of three countries with vastly different e conomic and political challenges. Each of the three countries, Georgia, Armenia and Azerbaijan, has assets and advantages that could bring peace and prosperity to a troubled region, and all could benefit considerably from regional cooperation. Unfortunately, the foundation for regional cohesion is lacking.
Despite a highly educated workforce and economic links to private interests abroad, Armenia has been adversely affected by the war in Nagorno-Karabakh plus a limited will at the national level to undertake genuine reform. Particularly susceptible to economic dislocation after the breakup of the Soviet Union, Armenia has been slow to make the transition to a market economy, and democratic reform has been tarnished by the flawed election and ultimate fall last month of President Ter-Petrossian.
A peace settlement on the Nagorno-Karabakh question would put an end to the trade and transport embargo. Trade routes would reopen, presumably attracting more investors, and would significantly reduce Armenia's claim on humanitarian assistance. However, Armenia's laxness in implementing reforms would have to be reversed in order to maximize the benefits of restored trade.
Let me mention two programs of particular note in Armenia. First, USAID has designed a comprehensive, integrated multi-year economic reform assistance program for Armenia. It encompasses up to seven major areas: accounting reform; capital market development; fiscal reform; land privatization; legal and regulatory reform; banking supervision; and additional strategic privatization work. Experience has demonstrated that sequential reforms in this area do not work; therefore, this program in Armenia is designed to be mutually reinforcing, and to accomplish more together than the components could in isolation. What we are emphasizing in this interrelated approach in particular is the realization of the tangible benefits of economic reform as soon as possible, and the need for ensuring that the host government is engaged as a full partner in the program's development and execution. In effect, the U.S. is being less prescriptive and acting more in tandem with the government's articulated predisposition to reform.
A second example whereby USAID wishes to act less like a donor and more like a partner is occurring in energy sector activities in Armenia. The energy sector in Armenia was been weakened by the effects of the 1988 earthquake that led to the closure of the Armenia Nuclear Power Plant; early civil disturbances in Georgia coupled with the embargo which caused a disruption in imports of energy sources; and historically low energy prices and low collection rates that promoted excessive energy use and insufficient revenues to cover maintenance and investment in facilities.
For several years, our recourse was to focus largely on getting commodities, into the country to ameliorate the worst effects of the war. But, ultimately, that was insufficient, as donations do not necessarily stimulate reform. Thus, our present emphasis is on systemic reform of the energy sector and the reduction of the hazards presented by the nuclear plant. A major milestone achieved in 1997 was the creation of an independent energy regulatory authority, an essential precondition to attracting private investment capital into Armenia's electric power system. The establishment of this authority was a condition of our 1997 grant of $30 million to Armenia for the purchase of natural gas. Our ultimate goal for Armenia is to privatize and improve the efficiency, in economic terms, of the power sector. As Georgia has been debilitated by the dissolution of the Soviet Union's energy trading relationships, we are urging them to do take similar measures.
Georgia has an even greater opportunity. While still struggling to consolidate peace among its disparate ethnic and political groups, Georgia is blessed with a reformist president, Eduard Shevardnadze, and a reformist Parliament. The consolidation of democratic order and the introduction of market-oriented reforms to a receptive audience is permitting Georgia to focus its full attention on the formidable task of political, economic, and social development after years of internal conflict. The special advantage Georgia has is geographic -- having begun to modernize its Black Sea ports, Georgia is a natural transit link for energy resources flowing from the Caspian Sea to the Black Sea and from the Caspian to the Turkish Mediterranean port of Ceyhan. American expertise in pipeline transactions has been made available to ensure that Georgia appropriately benefits from this potential.
The Georgian Parliament, as I mentioned, has been a particularly effective partner of late in the reform process. To complement their own efforts and to establish a model of what is possible for a modern Parliament, we have offered a vibrant assistance package. Capitalizing on computers and technical assistance provided by USAID to the President's office and to the Parliament, the Parliament has its own website and, further, can research laws and produce sample statutes from other countries. This is part of our larger effort to enable the Georgian Parliament to set up modern management systems. Finally, with the advice and assistance of our grantee, the National Democratic Institute, Parliament has demonstrated an interest in financial disclosure statements to combat corruption and acknowledges the wisdom of conducting hearings and investigations as a means of exercising its Constitutional powers.
The third Caucasus country I would like to address is Azerbaijan. In Central Asia, our early assistance efforts were governed by traditional demands for privatization, social sector restructuring, and the many corollary legal and regulatory institutions associated with democratic and economic transition. Yet, the challenges and opportunities presented by Central Asia are unique and demand special attention.
In effect, these five countries emerged from Soviet domination with rich and varied heritages from pre-czarist days but largely lacking in experience with modern statehood. Their borders are contrived and largely unpredicated on common language, religion, ethnicity or other attributes that contribute to national cohesion. Comparatively, Central Asian states were more isolated from the West during Soviet days and remained largely untouched by the first wave of political and economic reform initiated by the Gorbachev regime. Ideas about democratic governance and free market institutions are slow to filter through these societies where autocratic governance has been the norm and central planning the dominant ethos. The transitions from command to market economies are inhibited by industrial atrophy, agricultural collectivization and inefficiencies, a crumbling Russia-centric infrastructure and crippling environmental degradation.
Nonetheless, the region is also blessed with unique natural resource opportunities, oil being the most noteworthy, but also including water, other energy sources and valuable minerals. The challenge for the United States lies in helping these nations overcome their past in order to reap benefits from their natural resources and to stimulate regional cooperation. This requires the development of transparent and stable indigenous institutions that are attractive to foreign investors; that are able to absorb, redirect and diversify potential sources of income to modernize other elements of the economy over the long-term regionwide.
Therefore, USAID's strategy, beyond the traditional, is twofold. First, to tailor legal and regulatory and overall economic reform to accommodate the wealth coming from the extraction and transport of oil and other resources so that foreign investment does not dry up due to corrupt and unwieldy government demands. Second, to stimulate cooperation between the Central Asian nations and their neighbors in the Caucasus so that trade patterns, cooperative use of water and electricity, transport networks, etc. begin to reflect post-Soviet realities and practicalities.
Current petroleum production levels in the region are lower now than they were in Soviet times. Recent agreements about pipeline construction to accommodate Caspian Basin oil and gas offer new promise for accelerating the rate of production and volume to be exported to world markets. To further accelerate international investment in this sector, major legal and regulatory reforms are required, and we are assisting each of these countries in these efforts.
The electricity requirements for the region were historically managed through a "grid" system, independent of republic boundaries and subject to decisions made in Moscow. Similarly, the allocation of regional water resources, whether for "upstream" electricity needs in Kyrgyzstan in the winter or for "downstream" agricultural needs of Kazakhstan and Uzbekistan in the summer were also governed by Moscow.
Thus, to ensure the sovereignty and independence of the five Central Asian Republics, they must reach agreements on the most appropriate means of managing the region's energy and water resources, which profoundly affect the daily lives of each country's population and which, frankly, affect political stability in the region. Again, we are providing technical assistance to support these countries in this regard.
In particular, USAID will further support the Caspian initiatives, with technical assistance pertaining to pipeline economics, contracting and pricing; legal and tax regimes affecting pipeline investment, development and operation; pipeline finance; oil and gas pipeline/transmission; environmental and safety aspects of oil and gas pipelines; and rights of way, access and undersea pipeline and boundary issues.
Further, USAID is supporting the Working Group of the Central Asian Countries on Electricity Trading and Pricing, which is slowly moving towards regional agreements on such things as parallel operations of the electrical power systems and operation of national electrical grid companies.
Clearly, the concern remains in Central Asia that economic development commands international attention to the detriment of civil society, women's issues, health care, independent media, small business development and voter and civic education programs. Programs to address these priorities are no less important than investments in economic reform or oil revenues, largely because stability is by no means merely a matter of profits and losses as we have seen in other oil-rich regions. A vibrant civil society is the best insurance against corruption, capital-flight, authoritarianism and other anti-democratic impulses and our programs reflect these concerns as well.
Russia
As you might imagine, the challenge in Russia is to capitalize on the will to reform and yet cope with the complex causes of setbacks and unintended consequences. Russia sets the benchmark for reform and some truly remarkable progress has ensued. Mass privatization, free and fair elections, independent media, proliferation of NGOs, improved economic regulation and stability -- the strides have been stunning and dramatic. But, there are unintended consequences as well: crime and corruption, an arcane, complex tax system, unrealistic and non-transparent budgets, strained relationships between the center and selected regions, a fraying social fabric and disaffection overall with government.
We are asking for a 74 percent increase in funding in FY 1999, or increasing from $129 to $225, in large measure to expand Partnership for Freedom programs at the local and regional level and maintain limited but critical assistance at the central government level.
In the spirit of the Partnership for Freedom, which has as a critical element the removal of impediments to trade, USAID will continue to provide selected kinds of technical assistance at the central government level. In particular, we have as our highest priority tax reform: specifically, the establishment of tax policy; tax administration and the collection of tax revenues; fiscal federalism and apportioning responsibilities at the federal and regional levels; economic and revenue forecasting; and property tax. Passage by the Duma of a new tax code is anticipated this summer.
Tax reform in Russia is the highest priority for USAID technical assistance because the current tax system is the greatest barrier to increased domestic and foreign trade and investment. The current tax system not only fails to provide the revenue needed for the federal government to meet its obligations, the endemic tax avoidance feeds corruption throughout the Russian economy. Until the tax system becomes more equitable and transparent, it will continue to be a major hindrance to other economic and democratic reforms.
Also, in keeping with Partnership for Freedom goals, we are continuing our work in capital markets development. That there is a functioning Securities and Exchange Commission in Russia is attributable to USAID's assistance. Henceforth, our assistance will targeted to training regional SECs in licensing and other regulatory areas. Applying the same rules nationwide will permit the standardization necessary for markets to function.
In Russia, we also have underway an innovative new program which we believe fulfills the philosophical and practical underpinnings of the Partnership for Freedom program. This is the Regional Investment Initiative. The Initiative was announced by Vice President Gore and then-Prime Minister Chernomyrdin in February, 1997. The idea is to select several progressive regions with investment potential, provide concentrated support to these regions, and use them to display the positive effects of market reforms on trade, investment and growth. Intrinsic to the selection process was involvement by the Russian Ministry of Economy and regional officials to reinforce collaboration and mutual benefit.
By the end of June, 1997, the U.S. and Russian governments selected Novgorod Oblast as the first site for the Regional Investment Initiative. An interagency team designed a network of programs for technical cooperation, investment promotion and American partnership relationships specifically for Novgorod. Shortly thereafter, the American and Russian governments announced that the Russian Far East, with particular focus on Khaborovsk Kray and Sakhalin Oblast, would be the second site. In September, Samara was chosen as the third location and a fourth site is still to be selected, depending on the availability of funds.
The Novgorod pilot is now up and running and early results are impressive, and the future looks promising:
-- Norvgorod had been a regional leader in establishing clear land titles and to setting up a real estate market. Moreover, the City had been selected by the Russian government to put in place a unified tax-system. As a follow-on, a new lending agreement with the Russian bank, Sberbank, has made hundreds of individuals mortgage holders, paying reasonable interest rates and rarely defaulting.
-- The Citizens Democracy Corps and the Small Enterprise Assistance Fund (SEAF) are working in tandem to identify investment projects and shepherd them through the early gestation process. Thus, direct technical assistance is linked closely with investment capital. The EBRD also is beginning to link loans to technical assistance.
-- Novgorod, with U.S. technical assistance, established and devoted local funds to an investment promotion agency.
-- More than 50 microloans have already been made, and USAID's Loan Portfolio Guarantee Program will guarantee hundreds of small loans through the Russian bank, SBS-Agro. TUSRIF and EBRD's Russia Small Business Fund are also partnered with Russian banks.
-- The Eurasia Foundation has awarded 27 grants to NGOs, small businesses, and community organizations so that community involvement keeps pace with economic development
-- Partnerships with U.S. cities and organizations also are in place. Novgorod and Rochester, New York, have an active sister city relationship. USIA has awarded a partnership grant aimed at improving services for foster children and orphans. A city in the Oblast of Valdai, and Cannon City, Colorado have received a partnership grant to improve law enforcement through community policing programs. A law school partnership is being developed between Novgorod State University and Cleveland State University and Case Western Reserve.
Our guiding principles for the 21st century are straightforward. Exchange rates, private sector as a percentage of GDP, restructuring large industry are important, even critical to a nation's economy. But they mean little really if in the course of economic reform and the attendant hardships, governments cannot keep faith with the people. Favorable statistics matter to the West largely because they make the difference between growing foreign investment or skittishness about fledgling markets. But, if economic reform is an abstraction -- statistics notwithstanding -- to the people, and, if benefits never accrue to them directly, then all reform is imperiled and early experiments with democracy will turn brittle, eventually breaking. If at the grass roots level there is little will to sustain newly won freedoms and little demand for government accountability, reform will wither. And, the United States and the West will never recover the lost opportunities; the potential backlash in the failed states could lead to bitter anti-Americanism.
It is precisely for these reasons that we are most anxious to reach beyond Moscow and Kiev to expose individuals to the West and to make change beyond the center more palpable. Russia, Ukraine, Moldova and the other republics are unformulated and unfinished in many ways and, truly, it will take generations before they come to terms fully with post-communist needs. Our intent is to keep them connected to the West long after direct assistance is possible and to diminish their isolation throughout the tough times ahead. We all envision the day when the reform generation has a chance to mature and flourish, thus loosening the allure of ultranationalists and authoritarians and communists who would take these nations backwards to their repressive past.