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Pickering Before U.S.-Russia Business Council

Thomas R. Pickering, Under Secretary of State for Political Affairs Before the U.S. - Russia Business Council, March 21, 2000

As delivered Russia at a Decision Point

Thank you very much, Gene, for inviting me to be here today. Just before I left Moscow nearly four years ago, I gave a speech at the American Chamber of Commerce. I emphasized then America's commitment to Russia's transition to democracy and a market economy, and I forecast a bright future for the Russian economy.

My words then reflected the enthusiasm we all felt. At that time, Russia was the best performing emerging market economy. However, we were proven wrong. The crash of August 1998, as a result in part of the Asian financial crisis, set us all back a very long way.

Most telling are the economic conditions in which many Russians find themselves today. Over 35% of Russia's population lives on just over one dollar a day. Inflation is down from 80% in 1998, which is good news, but still reached 36% in 1999, which is continuing difficult news. These figures are discouraging for what they suggest about the possibilities for consumer spending and investment, as well as the effects of such poverty on the public's faith in the new economy, on its health, infrastructure, and social institutions.

Nonetheless, a long view is needed. Russia's natural resources, the capacity of its people, and its place in the world community have not changed and remain very significant indicators of its potential.

For those reasons, I remain an optimist about Russia over the long term, but with a major caveat: the raw ingredients of a vibrant economy exist but its achievement will depend on the decisions Russian leaders make. Resistance to reform must still be overcome.

It will take longer than we all thought, but there are some positive indicators even at this time. The Russian economy is growing, despite setbacks, because of the country's natural wealth and skilled workforce. Contrary to the dire predictions of economic collapse after the ruble devaluation in the Fall of 1998, the Russian economy seems to be on the rebound. And with that rebound comes opportunity for American investors. I would be interested in your views about what it will take for foreign investment to regain momentum.

As for the United States Government, we will stay committed to engagement with Russia because it is in our enduring national interests to do so.

Today, I would like to talk about Russian-American relations and the U.S. take on what's going on inside Russia as its presidential elections approach this weekend.

"Putin-ology" has become a cottage industry in Moscow and Washington. You only have to read the daily papers to know that. We've all heard about Putin as KGB Colonel in the 80s; Putin as St. Petersburg reformer in the 90s. Pundits are even analyzing the acting president's fascination with judo to predict what he will do if elected.

Most pollsters predict that Putin will win a first round victory on Sunday and become the Russian Federation's second president. They may be right, but we need to wait until the voters have made their choice, and then until Putin, when and if he gains the presidency, makes his choices.

The important thing is that this election will mark Russia's first democratic transfer of power in its 1,000-year history. One of the most overlooked facts about this election is that democracy is becoming unchallenged in Russia as the way to select leaders. Since the breakup of the Soviet Union, there have been three nationwide Duma elections and now two presidential elections, not to mention hundreds of regional and local elections.

Another overlooked development is Russia's progress toward developing a civil society, particularly outside Moscow and St. Petersburg. This is something that was evident to me in my travels in Russia 4 years ago and I think it is even more evident now. Russia today boasts 65,000 non- government organizations, up from just a handful a decade ago.

The immediate challenge for Russia's incoming presidential administration will be economic policy. Rising oil prices and import substitution have helped Russia's economy rally over the past year.

But sustained growth will require more structural reform, more capital, more investment, more growth, more jobs, and more of almost everything except crime, corruption, and concentration of the economy in state hands.

To keep rubles in Russia and attract dollars and deutschmarks from aboard, the new government is going to have to fix its tax laws and banking system, as well as to improve its overall investment climate.

Acting President Putin made some positive points last week in a meeting with foreign investors. He promised quick action on investment legislation, the tax code, and production-sharing agreements. Let me say we have heard that before. Now, he will have a real opportunity to demonstrate that he can make it happen. Both Putin and his team understand the need to accelerate progress toward the adoption of international accounting standards by companies listed on the Russian stock market. On the tax front, Putin has announced greater deductibility for advertising and other expenses. This is a good start and suggests that Putin has accepted that Russia needs to engage according to international standards.

No matter who wins next Sunday, this is the right, business-friendly approach for Russia's incoming government. It shows that Russia's leaders today understand that the idea of a separate, purely Russian path of economic development is not a viable option.

Russian businesspeople, as much as foreign investors, are clamoring for structural reforms. In my travels around Russia, I talked to businesspeople and bankers who advocated an overhaul of Russia's regulatory environment and tax system. Recent public opinion polls show that the economy is one of the top issues in the voters' minds today.

The other big issue for ordinary Russians is crime and corruption, which has been singled out as a priority by nearly all of the presidential candidates. Progress toward the rule of law applied fairly to all is clearly going to be difficult, but it is the only way forward.

Nine and a half years after the fall of communism, no one is under the illusion that Russia's path to democracy and a full market economy is getting any easier. The transition will require continued dedication on the part of Russia's leaders and patience on the part of its people. It will require the same of American officials and business leaders. I hope we have now put the "Who Lost Russia?" debate behind us. Secretary Albright said it best when she declared that, "The suggestion made by some that Russia is ours to lose is arrogant; the suggestion that Russia is lost is simply wrong."

The hearts and minds of Chechnya's people, both Russians and Chechens, however, are Russia's to lose. I frankly must tell you how disheartened I was when fighting in Chechnya began again last fall. I lived through the previous conflict and saw its divisive toll not only in the Caucasus but throughout Russian society.

We don't dispute Russia's right to fight terrorism on its soil. An armed incursion by Chechen separatists into Dagestan last August and apartment bombings may be the events that triggered the current fighting.

That, however, does not excuse the Russian Government's decision to use massive force against civilians inside Chechnya. The numbers speak for themselves: 200,000 people displaced, thousands of innocent civilians dead or wounded, and thousands of homes and businesses destroyed since last September. It will take decades and millions of dollars to rebuild Chechnya.

Russia's conduct of military operations has implications far beyond Chechnya. Allegations about atrocities committed by Russian forces have raised questions about the Russian Government's commitment to human rights and international norms.

I hope that Russia will move quickly to investigate these allegations in concert with the international community. Moreover, Russia needs to protect all of its citizens and their basic freedoms enshrined in the Russian Constitution.

The Russian Government's decision to clamp down on the media's ability to cover the conflict and its treatment of Radio Liberty's Andrei Babitsky have raised questions about its commitment to freedom of the press.

With the fighting in Chechnya, many Americans naturally ask why their government remains committed to engagement with Russia. The answer is a simple one: because our policy of engagement with Russia advances the safety and security of the American people. By working with the Russians over the past 8 years, we have helped to deactivate almost 5,000 nuclear warheads in the former Soviet Union; removed nuclear weapons from three countries; destroyed hundreds of missiles, bombers and ballistic missile submarines that once targeted our country; strengthened the security of nuclear weapons and materials at more than 50 sites; purchased more than 80 tons of highly enriched uranium -- enough to make more than 3000 nuclear warheads; and helped put in place barriers against illicit trafficking in weapons materials and technologies.

Today, that cooperation continues. Programs under our Expanded Threat Reduction Initiative will help Russia tighten export controls, improve security over its existing weapons of mass destruction, and provide opportunities for thousands of former Soviet weapons scientists to participate in peaceful commercial and research activities.

To combat nuclear proliferation, the U.S. and Russia have been partners in developing the foundations of a stronger international non- proliferation regime, based on the Treaty on Non-Proliferation of Nuclear Weapons.

Our policy of engagement is also designed to help Russians build the prosperous and democratic country that will be America's partner in meeting the challenges of this century. U.S. assistance programs have brought more than 35,000 young Russians to the U.S. for training, they have helped 275,000 Russian small businesses with financing or training, and they have reached out to 300 independent TV stations in Russia's provinces.

Russia and America also have common interests on many international issues. Over the past year, too much attention has been paid to the few areas on which our countries have strong public disagreements. Too little attention has been paid to our practical work together. Last year alone, Russian and American soldiers stood side-by-side to keep the peace in Bosnia and Kosovo, our diplomats helped negotiate the adapted Treaty on Conventional Armed Forces in Europe signed by 53 members of the Organization for Security and Cooperation in Europe, and our scientists worked to ensure that Y2K brought no nuclear mishaps.

Lastly, I would like to emphasize that we realize U.S. engagement is not limited to the government; it must also involve you American business men and women. Under the right conditions, I can see a future relationship that is increasingly defined by business and by people-to- people contacts.

I know we agree that Russia has enormous potential to create a competitive economy that in fact will provide widespread opportunity to its citizens. An important element to success is investment both from inside Russia and abroad. But, as I have told officials in Moscow many times, Russia will attract the investment it needs only if it creates the right business climate to spur more of you to invest money there.

Ultimately, Russia's future depends on the decisions that Russians must make. Russia is on the eve of a historic election. Decades from now, historians will not only note the election, they will judge the leaders based on their performance in office.

There has been much talk of reform, but talk is not what you or your Russian counterparts or the Russian people really need. Action is needed. If Putin is elected as expected, his tenure will be judged in large measure on his willingness and his ability to overcome resistance to reform. Russian officials need to continue to hear from all of you about what it is that is needed, including tax reform, banking reform, and WTO-conforming trade legislation.

I know that many of you have experienced very serious problems in doing business in Russia. I want to assure you that our very distinguished ambassador in Moscow, Jim Collins, and I are here to continue to act as your advocates in creating a level playing field and user friendly environment for American business there. I know that if there is any way in which we can be of help to you, you will, as in the past, not hesitate to contact us.

I firmly believe that a partnership of business and government is the best way to further our country's interests in Russia and that engagement with Russia is in our enduring national interest.

Thank you.

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