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. Last Updated: 07/27/2016

Sticking With Russia




The following is a shortened version of a speech given by U.S. Deputy Secretary of State Strobe Talbott on Nov. 6 at Stanford University.


As the '90s unfolded, "reform" and "market" went from being part of the vocabulary of triumph and hope to being, in the ears of many Russians, almost four-letter words. The noun "kapitalizm" came increasingly to be modified with the adjective "diky," or savage. Accordingly, "the West" went from being an object of emulation to a target of resentment. In the meantime, another word, "left" has come back into fashion. The Communist Party of the Russian Federation and its parliamentary allies have called for a "return" to a compassionate, paternalistic and pervasive state that looks out for workers, soldiers and pensioners.


The composition of Russia's new government, led by Prime Minister Yevgeny Primakov, is representative of this mood and of these trends. It has largely rejected what its officials call the "Western" way of managing their economy; they are groping for a "Russian" way instead.


But what does the Russian way mean in economics? Part of the answer is paying wages and pensions and reviving the industrial sector, which are sensible, indeed indispensable goals. Our concern is that, in trying to reach those goals, the Primakov team is prepared to abandon a stable currency, a viable exchange rate and a sound monetary policy. It is operating with neither a realistic budget nor a credible system for collecting taxes. That means Russia is at the mercy of the printing press, cranking out rubles to meet payrolls and keep bankrupt enterprises afloat. ... It has become all but impossible for the International Monetary Fund to weigh in with macroeconomic stabilization funds that might help in arresting and reversing the slide. Money from outside will do no good if it is inflated away or if it pauses only briefly in Russia before ending up in Swiss bank accounts and Riviera real estate.


Without external support, it is likely that the Russian government will face three disagreeable choices: 1) crank the printing presses even faster, 2) plunge deeper into default, or 3) stop paying wages and pensions and conducting basic government functions. Whatever combination of these measures the government adopts, Russia's economic situation is likely to deteriorate further. Economic decline carries with it the danger of political drift, turmoil, and even crackup. ... As Russia asserts its own special needs and distances itself from the West on the economic front, we may be in for heightened tensions over security and diplomatic issues.


But, friends and colleagues, so far that has not happened. The United States and Russia today are still cooperating far more than we are competing; we are still agreeing more than we are disagreeing. ...Virtually every issue between us can be boiled down to a matter of mutual interest and mutual benefit. Russia needs an effective nonproliferation regime since Russian cities would be vulnerable if its most dangerous technology ends up in the wrong hands. Russia needs strategic arms reduction since it cannot afford to maintain its arsenal at Cold War levels. And Russia definitely needs a collaborative relationship with Europe, including NATO and the European Union. ...


The U.S. supports a unitary Russian state, within its current borders. The violent breakup of Russia would be immensely dangerous and destabilizing. ... The horror that has unfolded over the past several years in the Balkans might be replayed across 11 time zones, with 30,000 nuclear weapons in the mix. ... The ability of Primakov and his successors to preserve unity will depend in no small measure on ... how they handle the economy in general and the ruble in particular. A nation's currency is a key manifestation and underpinning of its sovereignty - and its unity. This century has already shown that hyperinflation can destroy states, or turn them into monsters. ...


Even though international macroeconomic support of the kind that we provide through the IMF must wait until the Russian government shows itself willing and able to make the difficult structural adjustments necessary for recovery and growth, we will stay engaged in five key areas:


The Banking Sector: The silver lining of the collapse of the banking system is that it created an opportunity to create real banks that do real business, rather than just engage in speculation and arbitrage.


The Energy Sector: Russia will need close to $15 billion a year invested in its energy sector for each of the next seven or eight years just to get back to 1988 production levels. Western energy companies want in. But they will not invest in long-term projects unless the tax regime is clear, property rights are secure and they can take disputes to international arbitration. Russia knows the laws it needs to pass. And now is the time when Russian oil companies need to make clear to their legislators that foreign investment is not selling the patrimony but preserving it from destruction.


Food: Russia's bad luck over the past year included the worst grain harvest in 45 years. Despite large stocks from last year, it could use up all current food supplies by the end of the winter. ... We have told the Russians that we are willing to help.


Exchanges and Nongovernmental Organizations: These are people-to-people programs designed to broaden the base of support in Russia for open society and rule of law.


Cooperative Threat Reduction: The United States is safer today because of the investment we have made in our own security through initiatives like the Nunn-Lugar program, which helps Russia dismantle its most lethal weapons in accord with treaties like START I and the Chemical Weapons Convention. We will continue to work with the Russians to help them meet the financial costs of compliance with international arms-control and nonproliferation agreements.


By remaining engaged with Russia on all of these critical fronts in the months ahead, we will be demonstrating to the Russian government and people our determination not to give up on them, even - perhaps even especially in a time of troubles.