POLICY PAPER

ON

USA-RUSSIA RELATIONS

POLICY RECOMMENDATIONS REGARDING

HOW TO DEAL WITH RUSSIA (Policy and Politics International Perspective)

Ergul HALISCELIK Senior Treasury Controller

Republic of Turkey Prime Ministry Undersecretariat of Treasury

Policy Paper, Spring 2006

H. John Heinz III College, Carnegie Mellon University

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Background:

The Soviet economy and society declined in the following decades until General Secretary

Mikhail GORBACHEV (1985-91) introduced glasnost (openness) and perestroika (restructuring) in

an effort to renovate Communism, but his initiatives unintentionally released forces that by

December 1991 splintered the USSR into Russia and 14 other independent republics. Since then,

Russia has struggled in its efforts to construct a democratic political system and market economy to

replace the strict social, political, and economic controls of the Communist period. While some

progress has been made on the economic front, recent years have seen a recentralization of power

under Vladimir PUTIN and the erosion of emerging democratic institutions.1

The Legacy Left by President Yeltsin:

There were a number of turning points in Russia’s relationship with the West generally and

with NATO particularly after the dissolution of the Warsaw Treaty Organization in 1989.2

Yeltsin’s foreign policy, like Gorbachev's, could assist set the route for economic and social changes

in the country. Boris Yeltsin's primary aim in foreign policy was to build a non-threatening external

environment that would be most favorable to his country's internal economic and political

development. Yeltsin cooperated with Western states, obtaining membership for Russia in that most

exclusive of Western "clubs," the G7, and pursuing opportunities to cooperate with European Union,

and international financial organizations such as the World Bank, World Trade Organization and the

International Monetary Fund.3

Yeltsin primarily engaged with internal political and economic troubles in his final two years

in office. Many of these were because of his incorrect policies; in August 1998, Russia's economy

collapsed. A currency devaluation and moratorium on payment of external debts virtually destroyed

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opportunities for further credits or investments from the West. The greatest crisis in East-West

relations in the Yeltsin era took place in 1999 and resulted from a mixture of two volatile issues: the

continuing crisis in the Balkans and the NATO's expansion. The failed war in Chechnya, the sinking

economy and rising corruption are other legacy left by President Yeltsin.4

The Nature of the Current Russian Political System:

Russian political system is now dominated by President Vladimir Putin and his United

Russia party. At the 2003 legislative elections, United Russia reduced all other parties to minor

status. Other parties retaining seats in the State Council (Gosudarstvennaya Duma), the lower house

of the legislature, are the Communist Party of the Russian Federation, the Liberal Democratic Party

of Russia and the nationalistic Rodina ("Motherland") Block. In 2004, Prime Minister Mikhail

Kasyanov and his cabinet were dismissed by Putin. Putin won a second full term without difficulty

in the March 2004 presidential election, which has been criticized by OSCE (Organization for

Security and Co-operation in Europe) for the unfair use of state apparatus and media made by

Putin's party.5

The Nature of the Current Russian Economic System:

The economy of Russia accomplished a remarkable transformation in the 1990s. Economy

was transformed from the centrally planned economy to an economy operating on the basis of

market forces and private property. Russia ended 2005 with its seventh straight year of growth,

averaging 6.4% annually since the financial crisis of 1998. Russia has also improved its international

financial position since the 1998 financial crisis, with its foreign debt declining from 90% of GDP to

around 31%. Strong oil export earnings have allowed Russia to increase its foreign reserves from

only $12 billion to some $180 billion at year end 2005. 6

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These achievements, along with a renewed government effort to advance structural reforms,

have raised business and investor confidence in Russia's economic prospects. Nevertheless, serious

problems persist. Economic growth slowed to 5.9% for 2005 while inflation remains high. Oil,

natural gas, metals, and timber account for more than 80% of exports, leaving the country vulnerable

to swings in world prices.7

Other problems include a weak banking system, a poor business atmosphere that discourages

both domestic and foreign investors, corruption, and widespread lack of trust in institutions.

Especially after the investigations launched against a major Russian oil company in 2003 and

acquisition of the company by a state owned firm raised concerns that President PUTIN desires to

reassert state control over the economy. State control has increased in the past year with a number of

large acquisitions. Most fundamentally, Russia has made little progress in building the rule of law,

the basis of a modern market economy. Estimated 2005 trade figures of Russia as follows 8:

Exports: $245 billion (Export Partners: Netherlands 9.1%, Germany 8%, Ukraine 6.4%,

Italy 6.2%, China 6%, US 5%, Switzerland 4.7%, Turkey 4.3% )

Imports: $125 billion (Import Partners: Germany 15.3%, Ukraine 8.8%, China 6.9%, Japan

5.7%, Kazakhstan 5%, US 4.6%, Italy 4.6%, France 4.4%)

President Putin’s Foreign Policy:

Under the leadership of President Vladimir Putin, Russia continues to search for its new role

in the world. Forming relationship with western neighbors is a crucial part of this search, since both

Europe and Russia are undergoing tremendous internal changes. After the collapse of the Soviet

Union in December 1991, Russia was forced to urgently develop a new foreign policy framework.

For now, Russia remains beyond the political and economic boundaries of Europe and will continue

to act as an independent player in the foreseeable future.9

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Russia has been attempting to achieve several important goals simultaneously.

On one hand, it wants to ensure the country’s national security and territorial

integrity.

But the Kremlin also wants to gain back the influence possessed by the Soviet Union

in Europe and around the world to re-establish its place as one of the leading

continental powers.

At the same time, Russia wants to make its foreign policy economically sensible.

Europe and the United States are seen as external sources for the country’s economic

modernization.

These goals oppose each other. Russia today is not capable to separately guarantee its own

security while also contributing to global stability. For that, it needs the tight bonds of partnership

with and military and economic assistance from the United States, NATO, and the European

Union.10

Human Rights Issue:

Council of Europe establishes a minimum standard for the safeguarding of civil and political

rights in member states. Russian political leaders applied to enter the Council of Europe in May

1992. They did so for a number of reasons, including strengthening Russia's trade ties with Europe,

ensure an institutional connection with its former Soviet bloc partners, and gain acceptance as a

nascent democracy. There were 12 Entrance Criteria for Russia that I think the below issues are still

problems in Russia11:

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The need for, new criminal and criminal procedure codes, new civil and civil procedure

codes, and a law on the functioning and administration of the prison system,

The need for, law on the Procurator's Office, law on the Office of the Commissioner of

Human Rights, law for the protection of national minorities, law on the freedom of assembly,

and law on the freedom of religion.

Justice human rights violators in Chechnya

Allow for effective freedom of movement inside Russia.

U.S also supports many social, economic and human rights project in Russia12:

In Fiscal Year 2005, the $915.78 million

budgeted by all U.S. Government agencies

for assistance programs in Russia is

allocated roughly as follows;

Energy Resources:

Today, Russia is one of the most important actors for the energy resource in terms of both production and consumption. The below table is summary of the energy resources, production and consumption figures of the Russia and its share in the World economy.

Rank Country Oil – production (bbl/day) Date of Information 1 World 79,650,000 2003 est. 2 Saudi Arabia 9,475,000 2005 est. 3 Russia 9,150,000 2005 est.

Oil – consumption (bbl/day) 1 World 80,100,000 2003 est. 2 US 20,030,000 2003 est. 3 EU 14,590,000 2001 7 Russia 2,800,000 2005 est.

Oil – exports (bbl/day) 1 Saudi Arabia 7,920,000 2003 2 EU 5,322,000 2001 3 Russia 5,150,000 2004

Democracy Programs $43.44 million Economic Programs $9.74 million Social Reform $23.43 million Security & Law Enforcement $828.42 million Humanitarian $13.5 million Cross-Sectoral Initiatives $2.25 million

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Natural gas – production (cu m) 1 World 2,674,000,000,000 2003 est. 2 Russia 587,000,000,000 2005 est. 3 US 539,000,000,000 2003 est.

Natural gas – consumption (cu m) 1 World 2,746,000,000,000 2003 est. 2 US 633,600,000,000 2003 est. 3 EU 465,600,000,000 2001 4 Russia 402,100,000,000 2004 est.

Natural gas – exports (cu m) 1 World 667,600,000,000 2001 est. 2 Russia 157,200,000,000 2004 est. 3 Canada 91,520,000,000 2003 est.

Source: CIA - The World Factbook -Rank Order

Policy Recommendations Regarding How to Deal With Russia: The US and Russia should improve cooperation to respond to nuclear terrorism. Strategic

partnership with Russia against terrorism will be effective.

The US should cooperate with Russia to complete bilateral negotiations for Russia's

accomplishment to the WTO. This will improve commercial opportunities for both sides,

support economic reforms that Russia has made a priority, and further integrate Russia into

the world economy.

Cooperation on energy issues remains an area of great assurance for U.S.-Russian relations.

This issue will expand energy security, diversify energy supplies, and improve the

transparency of the business and investment environment.

US and Russia should also cooperate in a number of other areas such as Counterterrorism,

Space Cooperation, Humanitarian and Social and People-to-People Cooperation.

Moscow has concerned about American designs on the region’s oil and energy reserves and

required to protect its own access to these resources.13 So U.S has to consider this concern

and develop an effective diplomacy in the future developments.

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Determined bilateral relationship in conjunction with a more long-term strategy for growth

Russian civil, political, and economic societies will help Russia back onto a democratizing

path and it will effect U.S-Russia relations and world stability at large positively in the long

run.

Finally, there is oil. Russia is not only the world’s largest exporter of oil and gas, but also

still has one of the world’s largest oil reserve bases and owns 30 percent of the world’s

proven gas reserves. Assisting American direct foreign investment in Russia and increasing

the number of pipelines available to ship them are strategic American objectives which can

be pursued only through a cooperative relationship with the Russia.14

1 CIA - The World Factbook -- Russia 2 J.L.Black, “Vladimir Putin and the New World Order” 3 Robert H. Donaldson, “Boris Yeltsin's Foreign Policy Legacy” 41st Annual Meeting of the International Studies Association, Los Angeles, California, March 18, 2000 4 Ibid. 5 Politics of Russia - Wikipedia, the free encyclopedia 6 CIA - The World Factbook -- Russia 7 Ibid 8 Ibid. 9 Nikolai Zlobin, Harvard International Review, “Together But Separate Russia and Europe in the New Century” 10 Ibid. 11 Demokratizatsiya, Spring 2003 by A, Pamela Russia's Accession to the Council of Europe and Compliance with European Human Rights Norms 12 U.S. Assistance to Russia -- Fiscal Year 2005 http://www.state.gov/p/eur/rls/fs/48458.htm 13 Leszek Buszynski, “Russia;s new role in the central Asia” 14James M. Goldgeier and Michael McFaul, “What To Do About Russia” http://www.gwu.edu/~ieresgwu/WhatToDoAboutRussia.pdf