Mr. Chairman and members of the Subcommittee, I am very pleased to have the opportunity to testify here today about the Administration's plans for assistance to the New Independent States of the former Soviet Union, and most importantly about one of the President's top priorities in the foreign affairs budget, the Partnership for Freedom. The FY98 budget request for NIS assistance is $900 million, up from $625 million in FY97. The Partnership for Freedom supplies the vision and the framework for sustainable, mutually-beneficial cooperation between the people of the United States and the people of the New Independent States, and thus for a more secure and prosperous future.

Partnership for Freedom rests on a simple principle: the security of the United States and the rest of the world is immeasurably enhanced if Russia, Ukraine, and the rest of the NIS are stable market democracies. We must take specific actions to help these countries attain economic growth. Lack of growth will ultimately lead to destabilization which could raise new threats to our national security.

We must also accept the fact that reform in the NIS is a complex generational process, the outcome of which is, today, not yet secured. For example, although last summer's presidential election in Russia was remarkably free and fair, a monumental signal in its own right of reform's progress, 40% of Russian voters opted for the past. Many people in the NIS are still significantly worse off economically than they were in the Soviet Union. We must stay visibly and materially engaged to help ensure that lasting democratic and market institutions take root and prosper in the region. Over the next few years, we must help give people throughout the NIS region a more tangible stake in reform. The cost of this investment is small relative to the far-reaching benefits that stable, democratic New Independent States hold for the American people.

Presidents Clinton and Yeltsin issued a joint statement in Helsinki outlining their commitment to stimulating investment and growth in Russia, and to advancing Russia's membership in international organizations. Included in this statement was President Yeltsin's agenda to launch Russia on to its next phase of reform, including comprehensive tax reform, laws to strengthen the Production Sharing Agreements needed for energy sector investment, tough anti-crime laws, and ratification of the U.S.-Russia Bilateral Investment Treaty. Presidents Clinton and Yeltsin also applauded plans announced by Vice President Gore and Prime Minister Chernomyrdin to launch a regional investment initiative that will attract resources to key regions, including the Russian Far East. This initiative will demonstrate the impact of joint efforts on policy reform, investment finance, and the creation of new channels of commercial cooperation between regions in both countries. Although the primary responsibilities, and capabilities, for advancing the economic growth and reform agenda lie within Russia, this recognition that joint efforts between the United States and Russia play a significant, mutually beneficial role in the process is an underlying assumption of the Partnership for Freedom.

With Congress' support, the Partnership for Freedom will respond to this imperative. The United States represents the potential of democracy like no other nation in the world, and thus our visible engagement in the reform process provides a crucial boost to the hundreds of thousands of people with a new voice, and new economic opportunities, in the future of their nations

The Partnership for Freedom will deliver a strategic refocus of our approach to assistance, focused on fostering economic growth and investment, and no less important, on strengthening the myriad of new democratic institutions, most of them non-governmental, that have emerged over the past five years. These dual tracks for a reinvigorated program will give us the greatest chance of success in sustaining the political impetus for reform and democracy.

It is particularly important that Partnership for Freedom will be even more significant at the times that tensions between our nations are high. Business, people-to-people, and community ties are mechanisms which increase the survivability of stable market democracies over the long term, whatever the political situation is at a given point in time.

Phase I: U.S. Assistance from 1992 to the Present

We can consider the first phase of our engagement in the NIS to be complete when basic structural and institutional changes to a market democracy have taken place, such as:

Private ownership -- The private sector's share of GDP is now over 60% in Russia, 50-60% in Moldova, 50% in Ukraine, 40% in Kyrgyzstan, and 35% in Kazakstan. Privatization to this degree is a key building block for future economic reform and growth.

Elections -- Reasonably fair and open elections have had a significant impact the political process in Russia, Ukraine, and Moldova -- Russia now has held parliamentary, presidential, and regional elections since December, 1995. In those countries whose commitment to elections and independent political parties appears more tenuous, and where elections have been tainted, political leadership has had to accept the consequences of international scrutiny and condemnation.

Civil society -- Non-governmental organizations (NGOs) did not exist in the NIS in 1992. Since that time, there has been explosive growth in this sector, particularly in civic associations, policy think tanks, private universities, business and industry associations, citizen action groups, environmental groups, and many more varieties of public interest and advocacy organizations.

In addition to what is outlined above, other key building blocks are the rule of law, independent media, and functioning capital markets and financial institutions. Russia is closest to meeting these criteria, and Moldova, Kyrgyzstan, Ukraine, and Georgia are next in line. The other NIS countries are reforming at a slower pace.

The Administration's current proposal for introducing the Partnership for Freedom creates a staggered transition for the NIS countries from broad-based technical assistance programs to the concentration of resources on fewer activities. For example, over 91% of the FY 1998 program in Russia will be under PFF, in Ukraine 51% under PFF, and in Kazakstan 53%. Over the next four to five years, technical assistance will phase out in each country, and the longer term framework for remaining Freedom Support Act activities in the New Independent States will be the Partnership for Freedom package.

Phase II: Partnership for Freedom

The United States and the New Independent States ultimately want constructive bilateral relationships based on mutual respect and mutual geopolitical, economic and trade interests, not relationships based on assistance as such.

The Partnership for Freedom will include the following activities:

I. Investment and Capital Mobilization

1. Increase investment support in the regions, emphasizing small business and microcredit.

-- implemented through Eurasia Foundation, selected USAID grantees, EBRD Small Loan Program, USAID Loan Guarantees for Micro & Small Enterprises, Eximbank, OPIC, Trade and Development Agency, science & technology foundation

-- up to $163 million

2. Continue support for NIS enterprise funds.

-- up to $64 million

3. Remove impediments to trade and investment.

-- Targeted technical assistance for tax reform, WTO accession, legal reform, accounting standards reform

-- $20 million

4. Facilitate and accelerate World Bank and other IFI loans to NIS governments.

-- help NIS governments meet the structural reform conditions required by the World Bank and IMF for the release of major loans

-- $12 million

5. Link business training to specific investment projects involving U.S. companies and capital.

-- improve capabilities of enterprise managers, particularly in the regions, in those enterprises engaged in trade and investment with U.S. companies, small loan programs, and enterprise funds

-- $17 million

II. Consolidation of Democracy and Civil Society Gains

1. Significantly expand law enforcement and criminal justice reform activities to address problems of crime and corruption.

-- increase training in financial fraud, money laundering, organized crime, anti-narcotics, bank inspection; increase support to the International Law Enforcement Academy (ILEA) in Budapest for training NIS law enforcement professionals; provide non-lethal material support, such as forensics, computer, and communications equipment; increase training for judges and prosecutors

-- $29 million

2. Endow foundations to create sustainable support for new democratic institutions.

-- create long-term vehicles for U.S. support for democratic institutions such as NGOs, independent media and citizens' advocacy groups, that will carry on beyond the end of U.S. bilateral assistance activities

-- select foundations to be endowed partially on the basis of private matching funds

-- $41 million

3. Expand institutional partnerships to support cooperative activities at community levels, and expand cooperative activities in such areas of mutual interest as health, environment, energy, and technology commercialization.

-- support partnerships between business associations, hospitals, universities, cities, bar associations, charities, and other non-governmental organizations to foster and deepen commitments to participatory civil society and productive, mutually beneficial relationships between the NIS and the United States.

-- work through binational commissions with Russia and Ukraine

-- $59 million

4. Increase professional and academic exchanges with emphasis on young leaders.

-- seek to more than double the number of NIS citizens coming to stay in the U.S. for month, semester, and academic year programs; recruiting business interns, young professionals, and students; emphasizing community-based, home stay programs

-- $58 million

5. Strengthen democratic political organizations as they become part of the greater network of citizens organizations.

-- continue political party development through IRI and NDI, and support for election reform, and related NGOs and human rights organizations

-- $28 million

The FY 1998 request for $900 million is a 44% increase above the current fiscal year's budget for the NIS. This level of funding, combined with the strategic refocus of the program, will be able to support at least double the number of exchanges and partnerships. These funds will direct more than five times the amount of resources into investment programs, and more than double the level of effort on law enforcement and anti-crime activities compared with FY 1997.

Another major effect of these additional funds will be more resources for democracy and economic restructuring work in Central Asia (+60%), Georgia (+60%) and Azerbaijan (+90%) -- countries of key geopolitical and economic interest to the United States that have not been adequately supported due to overall budget constraints combined with congressional earmarks. Russia's budget will be up significantly from this year's $95 million to $241 million. Over 91% of the Russia budget will be directed to PFF activities. The amount allocated to Russia is still only 15% of that allocated in FY94.

The Partnership for Freedom is structured to operate in parallel with U.S. government security-related programs to promote arms control, nonproliferation, and regional stability. These include Department of Defense programs for Cooperative Threat Reduction, Counterproliferation, and Warsaw Initiative/Partnership for Peace efforts, as well as Department of Energy programs such as the Materials Protection, Control & Accounting activities. The PFF helps to strengthen our efforts in these security areas, and vice versa. All of these programs should be reviewed as a cohesive package, which together fulfill U.S. national security objectives.

Lessons Learned

I have been in this position now for over two years. The approach that I have taken in this time period, and presented to this committee on numerous occasions, has been aggressively focused on the notion of continuous improvement to maximize our effectiveness in meeting U.S. national interests, and to maximize our return on the investment of U.S. taxpayer dollars in the reform process. The implementing agencies and organizations have accomplished a tremendous amount in this regard, and Mr. Dine will get into more of that detail for USAID later in this presentation.

We have learned how far small amounts of funding can go to support reformers in real and lasting ways. Smaller, regionally based programs that are encouraged to be flexible and adapt to local needs, work best. We have never, and will never, invest as much as it would take to do it all, to make "the" critical difference. I actually do not believe that is even possible. But we have made, and must continue to make, many small differences. Today, regions in Russia such as Novgorod, Samara, Nizhny Novgorod have become models of accomplishment for the rest of the country on what is achievable by taking advantage of targeted assistance programs. We must and will do more in regions to create visible community-based impact. The heroes of the new market democracies in the NIS are not USAID, not the World Bank, not the EBRD; they are the people that we have supported, educated and made small loans to over the past five years -- reformers, entrepreneurs, and advocates for change from all levels of society, who deserve the credit for all the real and lasting accomplishments. They are winning a courageous battle.

We have learned that cost sharing works. Programs such as USAID's small business service centers and the Morozov small business training project in Russia have achieved 40% to 50% cost recovery from fee-for-service. The programs that recruit volunteer experts to assist and train private entrepreneurs and farmers all rely on major cost sharing with their NIS clients in addition to the valuable, donated time of the skilled Americans who volunteer. One of our most important exchange programs, Community Connections, (also known as PEP in some regions), is achieving great success in a pilot effort to have the professional exchange participants pay all of their travel costs to the United States and some of their per diem expenses while they are here. All of these community-based exchanges receive a tremendous amount of in-kind contributions of organizing time, accommodations, local transportation, and training from American communities all over the country that host these NIS groups. We have found that people who have a financial stake in the program will make the best use of it.

We have learned that the time lag between capital availability in our investment programs, such as TUSRIF, OPIC, and EXIM and our various funds, and the disbursement of that capital has been partially unavoidable as the NIS entrepreneurs come up the learning curve, and the impediments to investment in these countries remain numerous. Nonetheless, we have also observed that with skilled shepherding, and high quality training of local financial institutions, more can be achieved -- particularly with smaller projects and companies, and that we can now direct more resources where there are gaps, and make the necessary adjustments to the programs.

We have learned that it doesn't make sense to spend assistance dollars on restructuring large, formerly state-owned companies. Companies with a chance of pulling through this transition will be able to find the resources to pay for the consulting or training that it needs. Many business services providers exist now, both indigenous and foreign. We have ended programs that were funded back in 1994 and 1995 to do this kind of work, and retargeted private enterprise training resources to small and medium enterprises. NIS governments must play a critical role, as reform legislation is required to allow enterprises to sell land and other assets, shed some of the burdens of social services, and make a fair return on investment in a rational tax environment.

We have learned that we can accomplish tremendous leverage by focusing our technical assistance in some instances on helping the NIS meet structural reform conditions for major loans from international financial institutions. We, and most importantly the NIS side, achieve a tremendous return on our assistance investment through this kind of coordination.

We have also re-learned some old lessons about U.S. assistance -- that well managed, international coordinated humanitarian assistance efforts can save lives and help to maintain the stability of a region or country. In Armenia, Georgia and Azerbaijan, a region that faces numerous ethnic and cross-border conflicts since the break-up of the former Soviet Union, U.S. resources and leadership to bring in food, fuel, and medical commodities and to fund the Caucasus Logistics Advisory Unit have made a difference in helping these nations get through their most challenging early years. President Shevardnadze has stated on several occasions that it was U.S. humanitarian assistance that made the critical difference in helping Georgia maintain its stability and independence. The leverage that we have been able to achieve in our humanitarian program since inception in the NIS is huge and has often gone unnoticed -- $1.6 billion worth of 100% donated and surplus commodities delivered to 12 NIS countries in 480 airlifts, costing under $174 million in transport (through the end of calender year 1996). We should be very proud of this accomplishment.

Russia

While recognizing that some crucial forms of technical assistance, particularly those that address key impediments to investment like tax reform, will require continued work, the implementation of the Partnership for Freedom in Russia will create a much greater emphasis on Russia's regions and will address the following goals:

1. Working with regional governments to address key obstacles to investment, helping them to gain access to international capital markets, and strengthening regional financial institutions.

2. Increasing the availability of financing in the regions through EXIM, OPIC, the U.S.-Russia Investment Fund, and other small and medium-sized lending and equity investment programs and microcredit activities.

3. Increasing the level of support for exchanges and regional and community-based institutional partnerships that will link cities, universities, law schools, policy think tanks, and a variety of NGOS and citizens' organizations.

This regional approach to the PFF in Russia has been developed through extensive consultations with numerous American and Russian professionals and policymakers in the field of investment and economic development in Russia, who have identified the gaps in programs to date to be a lack of credit for smaller businesses in the regions -- the major engine for growth and real incomes for the Russian people. Vice President Gore and Prime Minister Chernomyrdin highlighted the importance of a regional investment initiative in a joint statement at the last meeting of the U.S.-Russia Binational Commission in Washington this past January. The Russian Far East has been acknowledged by both the U.S. and Russia as a region of great economic potential and will be included in this initiative. Other potential participating regions include oblasts in the Urals region and the Southern Russia-Volga region.

One extremely promising oblast in the Northwest of Russia, Novgorod, has been identified as an appropriate area to launch a "quick start" demonstration of the PFF and the regional investment initiative, due to the regional government's reform action, strong interest from the U.S. business community in Russia, and a significant level of existing assistance resources and programs on which to build.

The Novgorod region, with a population of about 750,000 people, today provides one of the most compelling illustrations of Russia's promise to become a prospering market economy. Although the region suffers from the same fundamental economic and structural problems as the rest of Russia, it leads Russia with the highest per capita foreign investment. Perhaps not coincidentally, Novgorod has one of the oldest traditions of democracy in Russia. Founded in the 9th century, medieval Novgorod was governed by an assembly of its citizens, the "veche," and prior to the establishment of St. Petersburg, was the major trading center of Northwest Russia. Now, through the dynamic leadership of its elected governor, Novgorod has established an investment-friendly climate, and has been recognized by the American Chamber of Commerce in Russia as one of the most progressive regions of Russia today. This region is not waiting for a handout, but instead is working diligently to enact reforms that have mobilized capital investment. This region and others like it should be the foci of our assistance effort through the Partnership for Freedom. There is no point to these programs if the local leadership, both in government and in the private sector, is not a major part of the solution, and willing to act to create real opportunity for the future.

One component of the PFF, "partnerships and cooperative activities," is best understood through the examples of working partnerships in the region. One notable example happens to be in Russia -- the partnership between the World Institute for the Disabled and the All-Russia Society of Disabled. With the material support, know-how, and encouragement of their U.S. partner the Russia group's membership has climbed to 2.4 million in 78 different regions. They have helped members set up over 1700 enterprises, as well as manufacturing companies that make wheelchairs and other equipment for the disabled. Their public education and outreach, leadership training, legislative advocacy, and efforts to bring disabled children more into the mainstream of Russian life add up to an incredibly powerful lesson for all NGOs in the NIS. Partnerships such as this one must have an important place in our long term engagement with Russians through the Partnership for Freedom. Many more existing relationships between U.S. and Russian organizations will be able to have significantly greater impacts on their communities with relatively small amounts of money.

Securing and advancing reform also requires leadership, and we are very encouraged by the newly invigorated government's approach to taking on some pressing issues such as demonopolization and public administration reform.

Ukraine, Central Asia, the Caucasus

The non-Russian NIS are still facing the most fundamental challenges of building new market democracies. These nations are building all of their government institutions from the ground up. The rule of law, media, and basic market institutions, such as banks, capital markets, and regulatory institutions are also at early stages in their development. Our national interest in supporting these countries through their transitions to becoming stable, independent, market-oriented democracies is extremely strong. The Partnership for Freedom approach, and the Administration's FY1998 budget request of $900 million, will allow the appropriate level of assistance resources to be directed to the non-Russian nations.

In Ukraine, with the second largest population and economy of the NIS, stability and growth are crucial to a secure and undivided Europe. In 1996, several important actions including the removal of the last nuclear weapons, ratification of a new constitution, and the successful introduction of a new currency, gave us great confidence in increasing assistance to Ukraine. Since last October, we have grown increasingly concerned about backtracking on key reforms -- particularly in privatization, agriculture, and the energy sector, and about bureaucratic obstacles and corruption, particularly as these affect U.S. investors. I raised these issues in Kiev last week with Ukrainian leaders. If these problems are not addressed concretely, we will consider scaling back assistance in certain sectors where backtracking on reform has been of greatest concern. We are also consulting with other donors and the IFIs to ensure that all of our programs are conditioned on measures of reform.

We have supported Ukraine because it is our national interest to do so, and this has not changed. Ukraine's reforms, as in all of the NIS, are part of a generational process that will have setbacks as well as great breakthroughs. We must be prepared to stay engaged through this process, and we must retain flexibility in our assistance program so that we can respond to both the setbacks and the breakthroughs with appropriate levels and forms of support. We must be realistic and have the ability to be flexible in meeting changing circumstances.

Assistance to the fledging market democracies of Central Asia and the Caucasus are strongly in our national interest. Their strategic location between Russia, the Middle East, and China, coupled with vast energy resources, make their stability vital to U.S. interests. We will continue to help nascent democratic organizations and institutions such as the independent media, non-governmental citizens groups, and educational institutions establish active, effective roles in these countries. Economic restructuring and support for small businesses will also continue to be a prominent part of our assistance program in Central Asia.

The Administration continues to oppose Section 907 of the Freedom Support Act, which since its inception in 1992, has hindered U.S. policy interests in the Caucasus region and Azerbaijan by severely limiting the promotion of U.S. investment, the encouragement of democratic and market development, and the advancement of the Nagorno-Karabakh peace process. We view our assistance efforts in the Caucasus region as a vehicle for furthering our policy objectives and interests in the region. The loss of U.S. influence in Azerbaijan threatens to undermine overall efforts for peace in the region.

Conclusion

The courage of the citizens of Russia, Ukraine, and all the New Independent States to stay on the path of reform is bolstered by our investment in democracy, free markets, and building strong people-to-people linkages with Americans. We must consider the strategic importance of the NIS both in a historical context, and as a part of our vision of the world that our children will inherit. The New Independent States greatly appreciate U.S. assistance, but do not want to rely on aid. The Partnership for Freedom is one of the top priorities of the Administration's foreign affairs budget. This is because the vital importance of constructive, mutually-beneficial relations with the NIS, and, as Secretary Albright recently expressed it in recent testimony, "the ultimate victory of freedom over despotism," are so important for the security of every American. U.S. assistance to date, and looking ahead to the Partnership for Freedom, is one of the smartest investments we can make to help insure the security, health, and prosperity of future generations.