Saving a Prostrate Russia: Is the West Withholding Help Until Total Disaster Has Struck?

IT MAY BE naive to hope that the Bush administration and Congress can be shaken from their torpor regarding the revolutionary changes in Russia. In the past six months, the Russian federation has thrown off communism, elected a popular president and, in the midst of economic chaos, announced radical reforms that would constitute history's most astonishing economic program.

From Washington? A little food aid, a little debt postponement and far less clear thinking.

After months of inaction, the administration announced last week that Washington will channel $1.5 billion in food credits to the 12 remaining Soviet republics. Ironically, Western credits have so far not even been linked to the reforms needed to make aid effective. The United States has not yet tried to work out with its allies a coordinated plan of financial and food support that will be vital if the dramatic Russian reforms, and Russian democracy, are to succeed. Robert Strauss, the U.S. envoy to Moscow, has reminded us of the price of failure: a possible resurgence of fascism with untold costs for the world.

To underscore the lack of coherence in Western actions, the United States and other Western governments also spent last week arm-twisting the Soviet republics to guarantee repayment of the Kremlin's $81-billion debt and to maintain scheduled interest payments. Under the agreement announced Thursday, some principal payments will be postponed, but huge amounts of debt service will have to be paid, sums that will dwarf the food credits.

The Soviet debt can - and should - be repaid in the long term. But for the leading industrial nations to be pressing for any debt servicing whatsoever in the next few months is a mindboggling misjudgment. The whole debt negotiation was in fact not based on the usual professional standards. There was no attempt to assess Russia's debt-servicing capacity in the coming months, which is basically nil, much less the need for new capital to support economic reforms. The International Monetary Fund (IMF) was not called in to make an assessment of the balance-of-payments situation. Wisely it has now been asked by both sides to help manage the reforms, but without the chance to tailor the debt deal to those reforms. And now Russia - a country on the the edge of hyperinflation and hunger - may be pushed over the edge by the financial squeeze in the coming months.

The administration's greatest shortcoming, though, has been a failure to galvanize U.S. public opinion. It has failed to explain our long-term stake in the success of Russia's democratic and market reforms. And by remaining virtually transfixed by Soviet President Mikhail Gorbachev, George Bush has virtually neglected the democratic revolution led by Russian President Boris Yeltsin.

The inaction and shortsightedness is bipartisan - a cruel twist to Sen. Arthur Vandenberg's historic post-World War II call for foreign policy bipartisanship. The Democratic Party leadership's capitulation may be even more distressing. Bush at least has shown some desire to help the economic reforms in Russia - even if in a typically insufficient manner. But the Democrats now make a virtue out of their neglect, claiming that America's economic problems will more quickly be resolved if the tumultuous events in Russia are ignored.

Both parties collaborated last week to kill a de minimus plan to transfer $1 billion from the defense budget to Soviet economic aid. And the dynamics of a presidential campaign may lead both parties to behave irresponsibly. Sens. Richard Lugar (R-Ind.) and David Boren (D-Okla.) have sensibly called for political considerations to be put aside; Boren, in a floor speech, said, "It is time for each side to say we're not going to score political points on this one. It's too serious."

What responsible U.S. leaders should also be saying is this: Barriers to aid have been washed away by the events of recent months. There can no longer be the fear that aid would inadvertently help the "wrong people" by propping up the old system. This concern would be especially vitiated if the United States finally abandons its focus on the Union institutions under Gorbachev and moves directly to support for Russia.

In fact, there should no longer be any confusion about whether to aid Russia or the Union. Russia has made clear that it alone has authority over taxes, resources and the money supply in Russian territory. Russia has taken over the central bank, the foreign exchange reserves, the oil and the legal authority to enter into financial contracts with foreign creditors. The battle of laws is over. Russia has won.

Nor should there be any doubt about the resolve in the Russian government about pursuing economic reform. Yeltsin has elevated to power the finest and most market-oriented economists in Russia. For those of us who have been visiting Russia regularly through the years of reform, Yeltsin's recent appointments are stunning. The reform team is unified, intellectually and by common bonds of friendship and struggle, behind the new deputy prime minister, Egor Gaidar. Gaidar has put in place a team of young and brilliant economists in their thirties.

Within two weeks of its appointment, this new team has managed to do much more than find offices, telephones and staff in the administrative chaos that engulfs Moscow. It has issued a set of remarkable decrees, which within weeks will free prices, make the ruble convertible and aim to get Russia's hyperinflationary budget under control. They have also welcomed the cooperation with the IMF and World Bank and have actually invited the IMF to set conditions as a way to establish their bona fide reform intentions. If economic transformation were a matter of brilliant ministers and good will, the Russian team would be on its way to success. But life is more tragic than that, particularly in the rubble of a collapsed empire. And the West not only needs to understand the potential tragedy, but find ways to address it sensibly.

In view of Russia's financial collapse (and in view of the experience of reform in Eastern Europe), one can make a few best-guess estimates of what is required: Russia now needs international support of about 5 percent of its $300-billion GNP each year for the next four or five years - about $15 billion per year. (The rest of the former Soviet Union, when it gets around to radical reform, might need a like amount.) In apportioning aid from the West, a fair U.S. share would be about 20 percent, or $3 billion; the European Community should put in $10 billion and Japan $3 billion. In addition, rather than strong-arming Russia to pay debt service that cannot be afforded, the West should acknowledge that a comprehensive rescheduling of interest and principle payments is needed in the early phase of stabilization. Even heroic measures by the G-7 to "lend" Russia money to pay some of the debts would be misplaced, since they would presume that Russia would have to keep servicing the balance of the debt in the short run.

Real assistance should be a mix of emergency food aid and balance-of-payments support, not a cosmetic rearrangement of debt servicing. A rough guide for 1992 would be $5 billion in food aid, $6 billion in balance-of-payments loans (to help Russia maintain the flow of crucial imports to keep the factories running) and $4 billion for a stabilization fund for the ruble, which the government will make convertible on Jan. 1, 1992. All loans should be conditional on the implementation of the radical reforms that Yeltsin and Gaidar have announced. The IMF should immediately be pressed into service to negotiate an "IMF-monitored" program with Russia, exactly as if Russia were an IMF member country. As usual, the IMF would provide strict conditionality, but the money would come from Western governments, not the IMF. Next year, Russia should be admitted as a member of the IMF and World Bank. The target date for admission could be the G-7 Summit in Germany next summer, after which the financial support would shift, in part, from the U.S. budget, to the balance sheets of the IMF and the World Bank. Thus, by the time that other Soviet republics became eligible for Western assistance, the overall burden could be borne by a combination of direct budgetary expenditures from Western governments together with funds from international financial institutions.

In no year, should direct U.S. budgetary outlays have to exceed $3 billion - which the United States can easily afford. Part can come in the form of food credits, which can be readily financed (and which have already been supported by the administration and Congress). Part, however, must come in the form of cash grants and loans. Since even a cash outlay of $2 billion would be considerably less than 1 percent of our annual military spending, the best strategy remains a diversion of up to 1 percent of our military budget to "economic security" spending on behalf of stabilizing the new democracy in Russia and in the other republics in future years. This is the third time in this century in which the West must address the vanquished. When the German and Hapbsburg Empires collapsed after World War I, the result was financial chaos and social dislocation. Keynes predicted in 1919 that this utter collapse in Germany and Austria, combined with a lack of vision from the victors, would conspire to produce a furious backlash towards military dictatorship in Central Europe. Even as brilliant a finance minister as Joseph Schumpeter in Austria could not stanch the torrent towards hyperinflation and hyper-nationalism, and the United States descended into the isolationism of the 1920s under the "leadership" of Warren G. Harding and Sen. Henry Cabot Lodge.

After World War II, the victors were smarter. Harry Truman called for U.S. financial support to Germany and Japan, as well as the rest of Western Europe. The sums involved in the Marshall Plan, equal to a few percent of the recipient countries' GNPs, was not enough to actually rebuild Europe. It was, though, a political lifeline to the visionary builders of democratic capitalism in postwar Europe.

Now the Cold War and the collapse of communism have left Russia as prostrate, frightened and unstable as was Germany after World War I and World War II. Inside Russia, Western aid would have the galvanizing psychological and political effect that the Marshall Plan had for Western Europe. Russia's psyche has been tormented by 1,000 years of brutal invasions, stretching from Ghengis Khan to Napoleon and Hitler.

Churchill judged that the Marshall Plan was history's "most unsordid act," and his view was shared by millions of Europeans for whom the aid was the first glimpse of hope in a collapsed world. In a collapsed Soviet Union, we have a remarkable opportunity to raise the hopes of the Russian people through an act of international understanding. The West can now inspire the Russian people with another unsordid act.

Jeffrey Sachs is Galen L. Stone Professor of International Trade at Harvard University. He is an economic advisor to the Russian government.