Russia's Realities, U.S. Responses - from The Russian-American Chamber of Commerce®

[Deb Palmieri on Russia Table of Contents]

The following article was published in the Russian Commerce News, November-December 1998. The Russian Commerce News is the official publication of The Russian-American Chamber of Commerce®.

Russia's Realities, U.S. Responses

All things considered, there's no doubt in my mind that the Russian situation is inching towards stabilization and recovery. Not without problems, not quickly. But the seemingly out-of-control free-fall we watched with apprehension during August and September has been reined-in to much more manageable proportions. Sure, things don't move as quickly or smoothly as we'd like, but that's life and the reality of a correction process after a century Russia has faced of revolution, civil war, involvement in two world wars, a failed Marxist economic model, a Cold War, and most recently, a failed reformist attempt.

There's an irony to the current situation and Western and U.S. responses to Russia. Many think we're saving money, preserving capital, gaining influence and in general helping ourselves by denying or severely limiting money, loans and support to Russia. The politicians see it as a form of inflicting punishment for undesirable behavior or as a means to thwart the development of a potential competitor and keep down a weakened superpower. The economists see it as prudent fiscal and financial policy or economic efficiency. The security community sees it as strengthening America's presence abroad by weakening Russia's military standing and choking off resources that might contribute to Russia's defense industry.

But these approaches neglect to realize that you gain more leverage, more influence and greater ability to extract desired behavior through the appropriate extension and delivery of financial means and instruments to countries facing sets of circumstances like Russia.

Think about it on the individual level. When a young couple finally secures a coveted mortgage to finance a first home, they are incentivized to engage in behaviors to sustain the home, make mortgage payments and keep a clean credit record. They maintain steady employment to guarantee monthly payments. This enables them to engage in spending to purchase consumer durables to fill the home with appliances, furniture, decorative objects, closets full of clothing and so on. That stimulates the economy. It creates demand. Demand creates jobs. It keeps the wheels of economic growth churning. The mortgage-holding family becomes involved in the community and school system. They are generating tax revenue at the local, state and federal level, paying property and sales, and other taxes. They usually end up buying bigger homes and more things to fill them with. They naturally want to contribute to the stability and viability of their communities and their country. In short, they are vested in their social environment, present and future - and it all began with a line of credit, a mortgage, a loan! And one, granted at reasonable interest rates and stretched over a 30-year period.

We might want to contemplate how the same concept can apply at the international level, and specifically to the provision of specially directed loan money to Russia. Just imagine, proper and well-targeted loans extended to finance household viability, project development and foreign direct investment viability. This way you could actually generate productivity, business growth, the expansion of goods and services, and hence economic recovery. The problem with loan money now is that most of it has been funneled into the unproductive sector of servicing interest-only payments. The "debt trap" is thus created and maintained; the cycle perpetuates itself without hope of reprieve. That's the situation Russia's in right now.

We somehow have to find solutions to create a "breathing space" for Russia to enable debt to be paid off in the future, while a current focus is on policies and loans to generate real economic growth today. Our political prejudices or inclinations [we drive policy now based on judgments to questions like: Is the political regime good or bad? Do we approve of the personalities involved? Do we like or dislike their domestic or foreign policies and thereby reward or punish them?] should not be the determining factor as to how we drive policy on the economic side of the equation.

Russia needs to be evaluated moreso on the basis of its potential benefit to our national economic future and the future of the global economy. Not only Russia, but our bilateral and multilateral relations with other countries will increasingly require decisionmaking along these lines.

The global economy is going through a wave of convulsions that is forcing in new technologies, modern economies, and space-age skills and forcing out obsolete methods, organizations and structures. It's a bottom-line shake-out. The survivors and winners will be those who understand this trend, plan for it and craft effective policies to guarantee national wealth, stability and viability. The United States must be prepared to maintain its standing and position during this process.

It is in our U.S. national interest to understand that by supporting Russia (and other developed or emerging market economies) through positive-based approaches like concrete economic assistance and the strengthening of the Russian national economy, we support and strengthen our own national position, and guarantee a higher degree of influence on and cooperation from Russia than we otherwise would through policies of negative-based approaches like abandonment, distancing, the withholding of support or other forms of sanctions, denials and restrictions.

But having said that, being forced to rely on their own resources and abilities is not necessarily a bad thing for the Russians. It demands streamlining, increased efficiency, productivity, creativity by forcing people and governments to do things differently and abandon old routine ways of doing things. Russia will likely grow stronger in the long-run if it relies on this path, moreso than by relying on outside assistance. When this happens, the West will look back and wonder why it was so short-sighted and narrow in its thinking that it didn't better position itself with this new global economic power, that might even become leaner, meaner, and stronger than any one of us now.

In this way, IMF intransigence and perceptions of loss of Russian international creditworthiness that will limit extensive financing could in the end work to Russia's benefit. When you are forced to survive on your own, you will somehow find a way to do it, and Russia will be no exception. If the international community wants to drive Russia inward, the Russians will make it on their own. But the cost to us is dear. We relinquish influence and risk a comeback-country most unwilling to function as a team player. So we must realize what we are risking and forfeiting as a result of our current policies.

The Russians should and will pull out all stops to continue debt renegotiation and try to gain IMF confidence and the release of promised loans and hasten the search to secure other sources of international loan money. But simultaneously also, they should focus domestically and spend more energy developing self-sufficient strategies that are growth-inducing from the bottom-up, rather than top-down. That means centerpiecing concepts of entrepreneurship, individualism, micro-business and regional growth as key links to economic recovery with government moral and financial support directed towards that end.

The best of all worlds would be one where Russians took this latter path, and the U.S. and West realized how and why it's in our own best interests to extend a generous helping hand, now, without delay. And the outcome would be stronger, interdependent national economies, more focused on improving the material well-being of constituents, less driven by political imperatives and better equipped to meet the challenges of the next century.

Deborah Anne Palmieri
Russian Commerce News, November-December 1998