Summary of the William J. Casey Institute of the Center for Security Policy Symposium on ‘Russia: Transformation — Or More Financial Bailouts?’

On 23 September 1998, in the early stages of the current Russian financial and political
free-fall,
the Center for Security Policy’s William J. Casey Institute convened a fascinating Symposium to
address the roots of this crisis and a pressing issue for American policy-makers: “Will
the
‘Primakov Doctrine’⁽¹⁾ of an aggressive foreign policy and
strategic modernization continue
to prevail at the expense of U.S. and Western taxpayers?”

Roughly 200 security policy-practitioners, economists, members of the press and other
participants made this Casey Symposium highly informative as well as exceedingly timely.
Particularly valuable were the insights shared by the lead discussants: Dr. Judy
Shelton, author
of The Coming Soviet Crash and Meltdown: Restoring Order to the Global
Currency System; Dr.
Marshall Goldman, Associate Director of the Davis Center for Russian Studies at
Harvard
University and Davis Professor of Russian Economics at Wellesley College; Roger W.
Robinson,
Jr., Casey Chair, President of RWR, Inc., and former Senior Director of International
Economic
Affairs at the National Security Council; and Thomas Moore, Director of
International Studies at
The Heritage Foundation and former Professional Staff Member on the U.S. Senate Armed
Services Committee. The program was moderated by Frank J. Gaffney, Jr.,
Director of the
Center for Security Policy who formerly acted as the Assistant Secretary of Defense for
International Security Policy.

The following pages summarize many of the important insights arising from this Symposium
regarding: the financial and political drama unfolding in Russia; the ruble’s devaluation, debt
default and global financial flows in and out of Russia; the prospects for economic and political
reform; and the strategic nexus between Russian financial developments and national security.
While no effort was made to formalize a consensus, the clear sentiment evident among most
participants was that the economic and political situation in Russia is likely to continue to worsen
— and that further American efforts to prop up the Yeltsin regime and ignore the ominous
implications of its Primakov Doctrine would be foolish in the extreme.

Elements of the Financial and Political Drama Unfolding in Russia

The stage was set for the afternoon’s discussion by remarks by the Casey Chair,
Roger W.
Robinson, Jr. Among the highlights of his overview were the following:

• “Already, one basically hears the ruble printing presses rumbling as I
  speak, presumably
  paying off wage and pension arrearages, as well as bailing out oligarch-owned banks, with
  what will soon be a highly inflated currency. The predictable new appeals to
  the IMF for
  continued disbursements, particularly of the next $4.3 billion tranche (remembering that the
  first $4.8-billion tranche of the $22.6-billion package disappeared into the ether in all of about
  3 weeks) will be predicated on a healthy dose of fear-mongering.”

• “This time, I suspect the line that will be most often used is the need to avoid the
  break-up
  of Russia into nuclear-armed principalities — that is, if we don’t pony up sufficient new
  cash
  infusions, and accept the so-called ‘Russian-way’ of advancing economic reform.”

• “I think that most folks looking at the situation, would agree that we are going to be seeing
  almost certain default on both Russian sovereign debt as well as former Soviet
  debt,
  which will be added to the $40 billion-plus in private bank and ruble-debt that has already been
  defaulted upon. This would make for a grand total of as much as $200 billion lost in
  ‘reschedulings’; what the New York Times terms ‘the largest default of any
  government in
  history.’ To the best of my knowledge, that statement is correct.”

• “This is not like the 1980’s when it was all commercial banks and Western governments
  making these loans to Russia. Those could be “rescheduled” — which is a euphemistic way of
  saying defaulted upon and moved to the right, to some distant future date, as took place with
  some $100 billion in Soviet debt. This time, it is not only the case that are you not supposed to
  “reschedule” bonds, but you cannot even find who the holders of
  the bonds are. They are
  everybody from some Swedish businessmen to a retiree in Florida; it’s very hard to gather
  them up and come up with some methodology for rescheduling.”

• “[Then Deputy Prime Minister] Chubais’ recent confession on the public record that
  Moscow
  deliberately deceived the IMF in order to secure that $22.6-billion package also did not do a
  great deal to encourage the Congress on IMF replenishment, and it is still going to be a source
  of concern — as those following congressional action on the IMF are witnessing.”

• “Meanwhile, on the defense and foreign policy side — something that we have always tried
  to
  commingle with our economic and financial assessments of Russia and other places consistent
  with the Casey Institute mandate — is the matter of the Primakov Doctrine. Mr. Primakov has
  been the principal architect of challenging and otherwise ‘stirring the pot’ for Western interests
  in places as varied as Iran, Iraq, the Balkans, Cyprus, North Korea, China, Cuba, the Caspian
  Sea, the Indian subcontinent, and elsewhere. At no time has he been challenged on the
  disbursement of Western funds. In fact, there has been almost a complete firewall
  between
  Western financial decision-making and Russia’s unhelpful behavior on the national
  security and foreign policy fronts.”

• “We have heard from our friend, J. Michael Waller, of the American
  Foreign Policy
  Council, that Moscow has actually predicated some of its defense budget projections
  on new IMF cash infusions. We should be under no illusion: The Russians are relying
  on our largess to fund some of these activities which are contrary to U.S. and Western
  security interests.”

• “IMF relief for Russia should not come in advance of a track record of genuine
  systemic
  and structural change….We have not seen: the institutionalization of private property
  rights,
  including obviously agriculture; a breaking up of the monopolies, which is moving in the other
  direction, such as Gazprom; the creation of a currency board and trying in a disciplined way to
  support that development, the dollarization of the economy, which is something that could
  happen overnight. There are more dollars available in the country than there are rubles. The
  Russians must establish Western-style legal and commercial codes, at long east. And they
  must cut undue military modernization and spending.”

The Ruble’s Devaluation, Its Impact on Global Currencies and Financial
Flows

Next, Dr. Judy Shelton provided a fascinating briefing on the dire state of
Russia’s currency —
and its implications for both the Russian economy and the global market. Highlights of Dr.
Shelton’s presentation included the following:

• “[Back in 1992,] instead of promoting and assisting Russia in areas we supposedly believe in
  —
  entrepreneurialism, small business, small farms, private ownership, start-up enterprises —
  we
  pushed government-to-government [financial] transfers. Worst of all, we sloughed
  them
  off onto the International Monetary Fund, as if the IMF had the secret to economic growth, or
  even any appreciation for entrepreneurial incentives and creativity.”

• “My own feeling was that what Russia needed was an economic reform plan that
  recognized the primacy of entrepreneurial activity, and I went on in [a 1992] article to
  suggest that Russia establish a currency board to provide a solid monetary
  foundation for economic growth and investment based on accurate price signals,
  and I also thought we needed to emphasize small business development.”

• “The fundamental economic problem in Russia today is the lack of a meaningful
  currency. The ruble has been consigned to fill all the gaps, to pay back wages, to
  extend
  credits, to flood the nation with liquidity. This is an old story in Russia, part of its Soviet
  history as well. I feel you cannot build a stable economy when the monetary foundation
  is not solid. It is like building on quicksand, and so that is why I am so pessimistic
  because
  that is where they are headed with Geraschenko back at the helm of the Central Bank in
  Primakov’s regime.”

• “I think a stable currency is a necessary, but obviously not a sufficient,
  condition for
  capitalism, because [during Lenin’s reign in the late 20s such a currency actually] saved
  totalitarianism. But you are not going to have a chance at capitalism without
  sound money.”li

• “I certainly thought the best thing for Russia was privatization as soon as
  possible, and to get
  those unprofitable enterprises out of the hands of government bureaucrats…ideally through
  vouchers. Talent would rise to the top, and the people — the Russian citizens who cared
  enough to understand vouchers and to understand what was going to be the beginning of a
  market, an equity market for shares in these enterprises that were being converted — would
  sort themselves out and become managers and take positions.”

• “That isn’t what happened to a large extent….It was more than the naivety or just sort
  of lack of familiarity with how equity markets work among the Russian people. That
  worked against privatization because they said, ‘What does this mean, I own a
  millionth of a truck factory? What does this mean?’ And then some slicker comes
  along and says, ‘I have a hedge fund, and I will buy those all up and I will give you real
  money for them.’ And the next thing you know, you have [criminal] schemes
  going.”

• “Where I would fault the West is that the perception of fairness was critical because you are
  coming from a culture of Communism. The perception of fairness was critical. We should
  have been making sure those people were educated enough to understand the process, and that
  is where I think we failed.”

• “Some people today would say that the next generation of businessmen will be reliable.
  They
  will finally come up with a commercial code where you can enforce contracts, but it has not
  happened yet. Maybe now it never will. I do not know.”

• “I think Russia should start a new currency with the currency board, but frankly go ahead
  and
  hyper-inflate the ruble, go ahead and do it….This is what has been done before with currency
  boards. You run two currencies parallel for a time, and it might take two-to-three years. Let
  the old ruble hyper-inflate to death and solve whatever little consumer problems, age problems
  are going to pass by people, but in the meantime, you start the real McCoy.”

• “You start bringing in outside investment. You start productive projects that create
  jobs, that generate legitimate revenues with the new currency, which then becomes the
  only meaningful currency for entrepreneurial productive activity that actually brings
  about economic growth.”

• “My fault with the IMF is they have so focused on the budget, and I care
  about the budget.
  I stared at those Soviet revenue expenditure statements over the years so much, down to the
  n’th degree of rubles in terms of how would they balance, and the fact was they obviously were
  not balancing — and that precipitated the crash.”

• “But my point is you cannot collect taxes. Everyone acknowledges that, but
  you
  cannot collect taxes if you are not generating profits, and you cannot generate
  profits if people are not saving, that is, not consuming, in order to use seed money to
  invest, to build up productive projects that then generate higher revenues in the future.
  That is what capitalism is all about.

• “And the IMF has focused on collections, on cutting expenditures, and increasing
  revenues. And what you worry about, growth first, balanced budgets later….If
  they would carry out [that] kind of program, I would be more open to our fully
  supporting them.”

• “I would even say make the funds [the IMF] gets conditional on launching a formal process
  to
  analyze the existing global financial system — the inadequacies, the non-monetary system we
  have. I would put [Federal Reserve Chairman] Greenspan in charge of the committees to do
  just that. I think they will decide the IMF and the World Bank do not fit into the global
  economy of the next millennium. And at that point, we can in an orderly way
  abolish
  them, when we have something to replace them — a new set of institutions or at least
  rule of
  law governing monetary relations. I don’t think you abolish them [at once] or else all our allies
  go crazy. You might make financial panic even worse. Instead we should have an orderly
  process to eventually return all of their funds to the member countries — and they are sitting on
  $130 billion in capital.”

• “We need to have something, I think, on the scale of Bretton Woods
  to revamp the
  monetary system or have some kind of international monetary accord, or else we are
  going to lose all of these countries that we want to win over to capitalism.”

The Implications of Debt Default and the Prospects for Economic and
Political Reform

Next, Dr. Marshall L. Goldman — one of the Nation’s most highly regarded
experts on the
former Soviet Union — led a discussion of what lies ahead for reform in Russia. Among the
many interesting points made by Dr. Goldman in the course of this section of the Symposium
were the following observations:

• “There are two approaches [to reform in Russia] that can be taken. There is the miraculous
  approach, and then there is the realistic approach. In one case, God assigns all the angels to
  Moscow, and they work and they manage to pay back all the back-wages. They manage to
  pay back the pensions. They manage to collect the taxes. They manage to balance the budget.
  They manage to increase the value of the ruble. They manage to break up the monopolies, the
  oligarchs. They manage to bring about a renaissance in agriculture. They manage to bring
  back the flight capital. Maybe some say $200 billion has left the country. They manage really
  to begin economic growth.

• “Now, in the second scenario, the miraculous case, the Russians do it by
  themselves.“

• “At one point, it used to be that the Russian stock market would reflect problems that we
  would have in this country or elsewhere in the world. Now, the Russian stock market
  reverberates out into the rest of the world, and our own stock market and our own
  economy has been very much affected by this, despite the fact that Russia
  is really not
  important economically in the world today. It was more important in the Soviet
  period, but
  today, its exports to us, for example, are about $3 billion. Our imports from them are about $4
  billion.”

• “So it should not have that much of an impact, but it does because of the globalization
  that has taken place [in the international economy]….So it is no longer the case we can
  really say we do not care what they do, because it does make a difference. It makes a
  difference not only to our investors, some of whom I must say deserve what they have
  gotten.”

• “The prospects, I think, are very dim, and it is something that concerns me
  enormously….There is deep anger over what took place, and we are blamed for it, even
  though when people ask “Who lost Russia?” my answer is: “the Russians lost Russia.”

• “Some of the advice we gave was wrong, but more importantly, our advice was
  really
  marginal. It was what the Russians themselves decided to do, although some of them
  were so
  eager, as Judy said, to end Communism that they neglected the fact that Russia is different,
  that Russia has a problem, and that simply adopting the external trappings of a market
  was
  not enough, and that you had to have something more than that.”

• “And privatizing, which was the first priority, as much of an adherent of the market,
  that privatizing was really the wrong thing to do in the way they did it. What
  happened is you gave rise to a group of oligarchs.”

• “The problem was that we did not understand that given Russia’s seventy years of
  Communism that they had managed to destroy whatever remnants there were
  of the market system, and it was not just the market system. It was the
  market environment — civil codes, commercial codes, lawyers, banks,
  accountants. All of these things were gone.”

• “The one good bit of news is that politically they have not up-ended the political
  system,
  and that they’re still playing by the rules. They are not necessarily our rules, but they
  are still holding to that constitution….There hasn’t been as yet rioting in the streets, and
  they
  are going through the Duma. Yeltsin proposed a government, and it was approved.”

• “Primakov is not what I would like to see, but for the Russians, I think if
  you put yourself in
  their position, they weren’t going to continue with the reform. And what is Primakov going to
  do? Well,[Tom Moore] is going to talk about his international program. It is not one
  that is
  going to favor the United States, you can bet your life, but it is also one that is not
  going to
  do much to continue with the reforms.”

• “What do the Russians need? What they need, I think, is years of trying to build up that
  [market] infrastructure that was missing….That takes a long time, and it is going to be hard.”

• “What should we be doing? One of the things we are beginning to do with our foreign
  aid policy, and it is a very small way, but I hope it will expand, is to focus just on
  building up that [market] infrastructure. Set up a small loan fund, which we have
  begun to do. Go out into the provinces.”

• “Somebody comes along and wants to start up a business, that’s what we do,
  that’s what we support. You want to start up a farm? That’s what we support
  because only that way will you build up a competitive structure when you can
  then meet this competition from these large monopolies.

• “The Russians — the Soviets — prided themselves on creating the largest production
  facilities
  in the world. They were monopolies. They were state monopolies. And privatizing
  them
  does not do a thing except create private monopolies, which do not address the
  issue.”

• “Until you can get an infrastructure of competition, until you can get a market out
  there that is working, then and only then can you really talk about privatizing
  effectively. And by all means, they should do it, but only under those circumstances.”

• “In Russia, what happened is when they began the privatization process, they did encourage
  —
  initially under Gorbachev, they began to allow a few businesses to open up, but just a few.
  And they were easily controlled by the Mafia. The Mafia grew faster than the small
  business environment.”

• “What you need is so many small businesses and a government that is strong enough to
  control
  the Mafia — but not so strong that it stifles business. And that is a very delicate line to walk,
  but other countries have done it.”

• “The bottom line is the Clinton Administration failed, the IMF failed in the Russian
  policy that they pursued. They knew what is happening with the assistance. They knew
  what is happening with the Russian policy….And the IMF continued to lend, and the
  U.S.
  government continued to push IMF to lend more and more. So that is where we are standing
  today, and as much as I support human exchanges and I support education, one of the failures
  of the U.S. policy was we did not close the knowledge gap that the Russians have to run
  market economy.”

• “We are facing something that people are not fully estimating. It is not a failure in a
  war, thank God, but it is a major policy failure, with long-term implications for the
  international system.”

This section concluded with an interesting conversation between participants about the
opportunities and desirability of working more closely with governors of Russian regions who
display a genuine commitment to free market and democratic reforms.

The Strategic Nexus between Russian Financial Developments and U.S.
National Security

Finally, Thomas Moore led a discussion of the ways in which the Russian
economic and political
situation depicted in the previous sections was likely to affect U.S. security interests. Highlights
of Mr. Moore’s remarks included the following:

• “I don’t think that anyone in this room wants to continue to fight the Cold War. I can
  certainly
  speak for myself — and, I think, for everyone here — that we wish the Russian people well. We
  wish Russia well. We understand that the Russian people are long- suffering. For 70 years,
  they were victims of Communism. Now they are victims of something new and, in many ways,
  more frightening and inexplicable: the oligarchs, the Mafia, and the sheer instability and
  uncertainty of their system, as they attempt without apparent success to make the transition to
  a civilized free-market democracy.”

• “We certainly hope they make that transition, but we have to be realistic about
  what
  we face. We have to tell the truth if we are to assist them in making that transition,
  while meeting our first obligation to our own national security.”

• “[Today,] we are, in effect, funding a continued Russian strategic
  modernization. Money
  is fungible, and in any case, we make no real effort to trace where our money goes.”

• “I went to Russia twice [for the purpose of evaluating the efficacy of the Cooperative
  Threat Reduction [a.k.a. the Nunn-Lugar Program], and we [observed that] very little
  effort is made to track and account for that money. Much of it was actually going to
  increase the ability of the Russians to store, deliver and handle their nuclear
  weapons.”

• “On the one occasion when then-Secretary of Defense William Perry went to
  Ukraine and there was a highly publicized event where the Ukrainians were
  destroying an SS-18, it had nothing to do with Nunn-Lugar. It was all a
  charade.”

• “It seems to me that our witless policy and our aid program — without any accountability or
  any strings attached — any sort of military quid pro quo, is continuing to fund the
  possibility of
  this shadow government, this incipient, irredentist, hard-liner government, which doesn’t take
  any genius to see is now returning to power. It won’t be Soviet Communism, but it will
  be
  some sort of hard-line regime, some sort of Russian national socialism, and it will be
  well-armed — thanks to our aid through Nunn-Lugar and through the
  IMF and through other
  loans and sources of financing.”

• “Dr. Goldman remarked about the deep anger on the part of the Russian people about what
  has happened to them. The humiliation that they feel from going as one of the world’s greatest
  super powers to what is essentially a basket-case and whose only claim to super-power status
  really resides in their nuclear arsenal, this concerns me greatly.”

• “If you read Professor Robert Kagan’s analysis about the cause of war, you find that
  very often it is these moral, social, cultural, and psychological factors that lead to
  conflict. So we cannot minimize the problem of the Russian anger and the fact
  that they blame us — perhaps unjustly, in some cases perhaps justly, for what has
  happened to them.”

• “I believe that our leaders and particularly our foreign and security policy elites in this
  administration, but also in the preceding one, are guilty of self-delusion, self-aggrandizing
  behavior, even dishonesty on a scale that really does threaten us. And unless we
  begin to hold
  this, the treachery of the intellectuals — unless we begin to hold them accountable, we are
  perhaps going to wake up one day and face a resurgent Russia still armed with awesome
  weapons, proliferating those weapons around the world as they continue to do, to places like
  Iran, and we are going to remain defenseless because we relied upon, frankly, the old Cold
  War paradigm for our security.”

• “Today, as you all know, we remain vulnerable to a missile fired at us from any part of the
  world, not just Russia. China has even threatened us with missile attack in 1995 over its
  dispute with Taiwan.”

• “North Korea has just tested a Taepo Dong 1 long-range, three-stage missile, which
  eventually could hit Alaska, Hawaii, perhaps even the West Coast. Iran, with the aid of
  Russian engineering, has tested its Shahab-3 intermediate-range missile that, with
  perfection and some more development, could hit U.S. troops and allies throughout the
  Middle East and in Southern Europe.”

• “And yet, we remain defenseless, and I submit to you that this is an unprecedented
  historical condition — that a great military and economic power, having the
  money, having the technological and other means to defend itself, deliberately
  chose to remain undefended, simply in order to preserve this cold-war relic, the
  ABM Treaty, which the Soviets and now the Russians have never abided by in
  any case. It is inexplicable.”

• “Mr. Primakov really was the architect under the old Soviet Union of their inroads into the
  Middle East. They still have their eyes on that region’s great resources: oil. So I think we are
  going to see challenges there.”

• “It won’t, again, be under the rubric of Marxist Leninism or Soviet Communism which
  gave some ostensible scientific rationale for their designs of world hegemony. It will
  simply be a sort of throwback to the old Czarist imperialism, but certainly, I think they
  will challenge us in that part of the world.”

The discussion that followed Mr. Moore’s remarks addressed such subjects as:
Primakov’s
role in fomenting instability in the Transcaucasus region with a view to dominating the Caspian
Basin’s potentially huge oil reserves⁽²⁾; the prospect that
upcoming arms control initiatives will
make it still more difficult to defend the American people against ballistic missile attack — another
important Primakov objective⁽³⁾; the Russian contribution to
the proliferation of weapons of mass
destruction and their long-range delivery systems; and the need for sound and strategically minded
U.S. leadership.

Conclusion

Events since this Casey Symposium was held have largely borne out its generally pessimistic
prognosis: The Russian economy continues to unravel; the government now functionally in the
control of Yevgeny Primakov has largely given up even paying lip service to the idea of real
reform; and the doctrine that bears his name remains the impetus behind increasingly unfriendly
Russian foreign policies, proliferation activities and threatening military programs. The Clinton
Administration has begun, at least rhetorically, to distance itself from its historic open-ended and
unconditional embrace of Yeltsin’s government. It remains to be seen, however, whether the
Administration will now adopt policies like those identified in the course of this Symposium —
policies that will, to the extent possible, encourage genuine reform in Russia and that will protect
the United States and its interests against the dangers inherent in a Primakov-led Russia that has
no interest in such reforms.

1. For a discussion of the aggressive security policy being pursued by
the KGB operative-turned-Prime Minister Yevgeny Primakov, see the following Center
Decision Briefs entitled Restoration
Watch #10: Consolidation Of Power By Primakov Marks The End Of The Line For Reform
In Russia (No. 98-D 161, 10 September 1998;
Primakov Watch: Destroying NATO From
Within (No. 98-D 14, 22 January 1998); and
Restoration Watch #7: Primakov’s Promotion
Marks Major Step On The Road ‘Back To USSR’ (No.
96-D 02, 10 January 1996) .

2. This subject has been the focus of a series of papers by the Center
for Security Policy and the
first Casey Institute Symposium..

3. See the Center Decision Briefs entitled
Critical Mass #4: Emerging Missile Threat
Concentrates The Minds Of U.S. Allies; Japanese Admiral Urges End To ABM
Treaty (No.
98-D 163, 15 September 1998); and Critical Mass #2: Senator Lott,
Rumsfeld Commission
Add Fresh Impetus To Case For Beginning Of Missile Defense ( href=”index.jsp?section=papers&code=98-D_133″>No. 98-D 133, 15 July 1998).