Boris Yeltsin arrives in Washington this week after considerable behind-the-scenes debate in the Clinton Administration about U.S. aid policy to Russia and the other states of the former Soviet Union. The State Department has decided to shift the focus of U.S. aid from technical assistance aimed at improving the investment climate in Russia to, in essence, subsidization of U.S. trade and investment. Such a shift is a serious mistake.
The State Department's coordinator for assistance to the newly independent states, Ambassador Thomas Simons, strongly pushed for an expanded role for our Export-Import Bank and Overseas Private Investment Corp. Another major beneficiary from the change in policy is the U.S. Trade and Development Agency, an independent government agency that provides funding through non-reimbursable grants to American firms for feasibility studies overseas.
Not surprisingly, the Trade and Development Agency is popular in the House and Senate as a means to funnel assistance to corporations in members' districts. At a time when legislative pork-barreling is under attack, this agency merits serious scrutiny.
Since late 1991, the trade agency has also been in the business of doling out aid money intended to help reform in Russia and the other states of the former Soviet Union. But instead of helping to promote economic development in Russia, the agency is subsidizing feasibility studies for companies interested in exploring business opportunities there. This is not the way to help the Russians help themselves.
In July, the agency awarded 19 economic assistance grants that "will strengthen the commercial ties between the United States and Russia," according to an agency press release.
A look at the awards, however, reveals that the only "strengthening" being done is in American corporate coffers--at U.S. taxpayer expense and at the expense of effective aid to the newly independent states.
The 19 grants provide $6 million in "feasibility study funding" for a wide range of projects. A number of the companies involved have already established a presence in Russia. Moreover, one would think that General Electric, with revenues of $62.2 billion last year, Owens Corning ($2.9 billion) or Marriott International ($8.7 billion) could afford feasibility studies in Russia on their own without U.S. government support.
Marriott International, for example, will receive $435,000 from the trade agency for a study on construction of a Marriott hotel to replace an Intourist hotel in downtown Moscow. Spending U.S. taxpayer dollars on such a study is truly difficult to justify.
The trade agency says that it must play a "facilitative role" in selecting grantees, or the "project would not move forward." It is hard to imagine that a General Electric study on co-production of large gas turbines in St. Petersburg would have collapsed without $600,000 in trade-agency support.
Since reform in Russia was launched in 1992, Western governments and international lending agencies have been urging the Yeltsin administration to reduce state subsidies to enterprises. Successful transformation from a centrally planned system to a market economy, after all, requires an end to the reliance of plants and factories on government funding.
Yet contrary to the advice it is giving Russia, the U.S. government is bolstering its role in American firms' trade and investment efforts.
"Russian authorities are used to dealing with foreign partners on a government-to-government basis," said Daniel Stein, the trade agency's regional director for the newly independent states, in Senate testimony last year. U.S. competitors, he said, "often have the direct or indirect support of their governments . . . . Not only does this give our competitors a clear financial advantage, it also raises their profile in the eyes of their (newly independent state) partners because of the active support and participation of their respective governments. (The trade agency) is in a unique position to help American companies overcome some of these barriers."
Instead of downplaying the state's role, the Clinton Administration has decided to get the U.S. government more involved to try to "even the playing field." Such involvement perpetuates, even increases, both the Russian and American governments' roles in what should be private-sector activity. Shifting even more resources to the trade agency, as advocated by the State Department, clearly sends the wrong signal to Moscow.
Doing business in Russia and the other states of the former Soviet Union is not for the faint of heart, and foreign business activity will not pick up unless the investment climate there improves. For the Russians, this means creating a simpler, less burdensome tax structure for foreign ventures and clearer investment legislation.
"(The Trade and Development Agency) provides an incentive for U.S. companies that are interested in developing business in Russia, but are unwilling to assume all of the inherent political and economic risks," Stein testified last year. "Despite the opportunities in the (newly independent states), many U.S. companies remain hesitant to commit their own resources to developing the market . . . . There are many less risky places to do business." Yet the trade agency puts U.S. tax dollars at risk to fund feasibility studies--through non-reimbursable grants, no less--because corporations are reluctant to do risk their own money.
The U.S. government, Stein testified, "has a broader strategic interest in promoting U.S. private-sector involvement" in these countries. The trade agency is surely a poor way to accomplish that goal.