1 107TH CONGRESS "!S. PRT. 1st Session JOINT COMMITTEE PRINT 107–50 RUSSIA’S UNCERTAIN ECONOMIC FUTURE COMPENDIUM OF PAPERS SUBMITTED TO THE JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES DECEMBER 2001 Printed for the use of the Joint Economic Committee U.S. GOVERNMENT PRINTING OFFICE 76–171 CC WASHINGTON : 2002 VerDate 19-JUN-2001 09:18 Jun 12, 2002 Jkt 000000 PO 00000 Frm 00005 Fmt 5012 Sfmt 5012 D:\DOCS\RUSSIA\76171.000 CRS1 PsN: CRS1 congress.#13 VerDate 19-JUN-2001 09:18 Jun 12, 2002 Jkt 000000 PO 00000 Frm 00006 Fmt 5012 Sfmt 5012 D:\DOCS\RUSSIA\76171.000 CRS1 PsN: CRS1 congress.#13 FOREWORD By Senator Robert F. Bennett Russia’s economy has rebounded significantly since the crisis of 1998. Economic growth has resumed, unemployment has fallen, and production, consumption, and investment have all expanded. At the same time, Russia has initiated a series of promising eco- nomic reforms, including strengthening its banking system and en- acting fundamental tax reform. These improvements illustrate Russia’s potential for a strong eco- nomic future. At the same time, memories of past economic difficul- ties demonstrate the risks that Russia faces if its reforms do not succeed. Russia’s economic future is of great importance to the United States. To assist American citizens and policymakers in thinking about that future, I asked the Congressional Research Service to commission a collection of expert reports on the Russian economy. The resulting reports review the recent history of the Russian econ- omy, analyze current policy issues, and consider possible futures. The reports were prepared by experts—in academia, the private sector, and government—who represent a wide diversity of profes- sional perspectives on the Russian economy. The reports thus re- flect a broad range of opinions on the challenges and opportunities before Russia. The views and conclusions in these reports are those of their authors, not those of the Joint Economic Committee or any of its individual members. I hope that these reports will contribute to our ongoing efforts to understand the Russian economy. I thank the Congressional Re- search Service for its efforts and the authors for sharing their ex- pertise. (iii) VerDate 19-JUN-2001 09:18 Jun 12, 2002 Jkt 000000 PO 00000 Frm 00007 Fmt 6601 Sfmt 6601 D:\DOCS\RUSSIA\76171.000 CRS1 PsN: CRS1 VerDate 19-JUN-2001 09:18 Jun 12, 2002 Jkt 000000 PO 00000 Frm 00008 Fmt 6601 Sfmt 6601 D:\DOCS\RUSSIA\76171.000 CRS1 PsN: CRS1 C O N T E N T S Page Foreword, by Senator Robert F. Bennett ............................................................... iii Historical Note ......................................................................................................... vii Highlights, by John Hardt ...................................................................................... ix Overview, by John Hardt ........................................................................................ xi PAST ECONOMIC PERFORMANCE AND INSIGHTS FOR FUTURE PROSPECTS Russia’s Economic Performance: Entering the 21st Century, by William H. Cooper ................................................................................................................... 3 RUSSIA’S ECONOMIC CHALLENGES Removing Barriers and Providing an Incentive System ........................... 25 The Russian Economy: How Far from Sustainable Growth?, by Ben Slay ........ 25 Unlocking Economic Growth in Russia, by Vincent Palmeda and Bill Lewis .... 47 Administration and Reform of the Russian Economy, by Paul Gregory and Wolfram Schrettl .................................................................................................. 81 Russian Crime and Corruption in an Era of Globalization: Implications for the United States, by Jonathan M. Winer and Phil Williams ......................... 97 Financial Reform: Taxes, Budgets and Banks .............................................. 125 Tax Reform in Russia, by Z. Blake Marshall ........................................................ 125 Putin’s Dilemma: Austere Budgeting in a Poor State, by James A. Duran, Jr. .......................................................................................................................... 141 Russian Defense Spending, by Christopher J. Hill ............................................... 161 Russian Financial Transition: The Development of Institutions and Markets for Growth, by David M. Kemme ........................................................................ 183 Breakup of Monopolies: Energy, Transportation and Agriculture ......... 213 The Russian Energy Sector: Current Conditions and Long-Term Outlook, by Matthew J. Sagers .......................................................................................... 213 Agricultural Reform: Major Commodity Restructuring but Little Institutional Change, by William Liefert ................................................................................. 253 Human Capital and the Social Contract ........................................................ 283 Russia’s Demographic and Health Meltdown, by Murray Feshbach ................... 283 Social Welfare: A Social Contract, by Judyth L. Twigg ........................................ 307 LONG-TERM PROSPECTS FOR RUSSIA’S ECONOMIC GOVERNANCE Long-run Prospects for the Russian Economy, James R. Millar ......................... 329 Russia’s Evolution as a Predatory State, by Peter J. Stavrakis .......................... 347 RUSSIA’S ECONOMIC FUTURE AND U.S. INTERESTS U.S. Bilateral Assistance to Russia, 1992–2001, by Curt Tarnoff ....................... 369 Arms Exports and Russia’s Defense Industries: Issues for the U.S. Congress, by Kevin P. O’Prey ............................................................................................... 385 U.S.-Russian Trade and Investment: Policy and Performance, by Inga Litvinsky, Matt London, and Tanya Shuster .................................................... 411 Russia and the International Financial Institutions: From Special Case to a Normal Country, by Jonathan E. Sanford ...................................................... 425 (v) VerDate 19-JUN-2001 09:18 Jun 12, 2002 Jkt 000000 PO 00000 Frm 00009 Fmt 5905 Sfmt 5905 D:\DOCS\RUSSIA\76171.000 CRS1 PsN: CRS1 VerDate 19-JUN-2001 09:18 Jun 12, 2002 Jkt 000000 PO 00000 Frm 00010 Fmt 5905 Sfmt 5905 D:\DOCS\RUSSIA\76171.000 CRS1 PsN: CRS1 HISTORICAL NOTE This study belongs to the series of committee prints for the Joint Economic Committee by the Congressional Research Service and its predecessor, the Legislative Reference Service, dating back to the 1950s, on the economies of the Soviet Union and successor states, the People’s Republic of China, and Central Eastern Europe. In No- vember 1959, the Joint Economic Committee held a week of hear- ings that highlighted the publication entitled Comparisons of the United States and Soviet Economies. These hearings were a con- tinuation of the committee’s past interest in this subject that had resulted in the publication of two studies prepared for the commit- tee by the Legislative Reference Service of the Library of Con- gress—one, in 1955, entitled Trends in Economic Growth: A Com- parison of the Western Powers and the Soviet Bloc, and the other, in 1957, entitled Soviet Economic Growth: A Comparison with the United States. The first study on the People’s Republic of China, An Economic Profile of Mainland China, was released in 1966, after the initi- ation of the Cultural Revolution. The first volume on Central East- ern Europe, Economic Development in Countries of Eastern Europe, was released in 1970, following the Soviet invasion of Czecho- slovakia. Other studies followed at regular intervals. The most recent study in this long series was China’s Economic Future: Challenges to the U.S. Policy, released in 1996. The most recent study on Eastern Europe was East-Central European Econo- mies in Transition, released in 1994, which was preceded by a two- volume study, The Former Soviet Economies in Transition, released in 1993. (vii) VerDate 19-JUN-2001 09:18 Jun 12, 2002 Jkt 000000 PO 00000 Frm 00011 Fmt 6601 Sfmt 6601 D:\DOCS\RUSSIA\76171.000 CRS1 PsN: CRS1 VerDate 19-JUN-2001 09:18 Jun 12, 2002 Jkt 000000 PO 00000 Frm 00012 Fmt 6601 Sfmt 6601 D:\DOCS\RUSSIA\76171.000 CRS1 PsN: CRS1 HIGHLIGHTS By John Hardt 1 The authors in this volume analyze the present state of the Rus- sian economy and its future possibilities. Vladimir Putin has com- mitted himself to economic reform in his 2 years as Russia’s presi- dent. The opportunity for a transition to a democratic market econ- omy is more likely now than at any previous time in Russian his- tory. This volume explores the opportunities offered by this transi- tion and the obstacles it faces, with particular reference to Putin’s reform agenda. The main findings of the volume are as follows: • Sustained economic growth will be crucial to all reform efforts. Russia’s recent performance since its financial crisis in 1998 has been positive in terms of both its annual growth of gross domestic product (GDP) and its balance of payments. Whether this recent performance represents a new trend line of sus- tained growth or is a part of a cyclical pattern of prosperity and crisis remains unknown. • Putin’s unfinished reform agenda features changes critical to the development of a pluralistic market system under the rule of law, such as the establishment of market-friendly adminis- trative and judicial systems and the introduction of an effective banking system. Bureaucratic