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. Last Updated: 07/27/2016

A Common Ground for the U.S. and Russia

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I am privileged to have served as secretary of state during the dramatic years of communism's collapse. It was an exciting era, full of hope at the prospect of freedom sweeping the former Soviet Union. But it was also a time of anxiety, as many worried that the end of the Soviet Union would lead to instability, chaos and conflict.

In the sometimes tumultuous years that followed, there was ample evidence for both exhilaration and anxiety. But looking at Russia today, it is clear that the optimists were right and the pessimists wrong. Over the course of the last four years -- years marked by a global economic slowdown -- Russia has posted robust growth of between 4 percent and 9 percent annually.

Unlike the situation leading to the catastrophic financial collapse of 1998, foreign exchange reserves can now easily service Russia's debt. In terms of its tax regime, Russia has made similarly great strides, with a flat income tax, an overhauled profits tax and the lowest marginal tax rate in Europe.

And Russia's financial maturity has found expression in New York-listed stocks, well-managed initial public offerings and a Russian equity index that has performed among the best in the world over the past two years.

Now recognized as a market economy by both the European Union and the United States, Russia has moved closer to membership in the World Trade Organization. Russia's ascension to the WTO -- perhaps as early as next year -- has gained powerful momentum.

Not least, there is now a robust U.S.-Russian private sector partnership to promote bilateral economic ties. The Russian-American Business Dialogue -- launched by Presidents Vladimir Putin and George W. Bush at the 2001 Genoa Summit -- serves as a powerful tool for removing obstacles to investment.

Russia, in short, has come far. And so has U.S.-Russian cooperation on economic issues. But huge challenges remain. Russia's core manufacturing sector remains in decline, with much of its infrastructure obsolete. Demographic trends suggest a shrinking workforce starting in 2005.

Despite major efforts, corruption is a lingering concern. Economic restructuring still has far to go. And, most important of all, the rule of law -- a vital precondition to sustained growth and a successful market economy -- is far from taking hold, as it must if Russia is to prosper.

Given Russia's substantial economic potential and the structural reforms already under way, there is plainly far greater scope for U.S.-Russian economic activity. And to make that happen, we should recognize that the time has long since passed to graduate Russia from the Jackson-Vanik amendment.

President Bush has declared his desire and intention to make that happen. After all, the goal of that legislation -- that Russia become an open society permitting the free emigration of Jews -- has, for all citizens, was achieved long ago.

One area for cooperation is, clearly, energy. Russia is a world leader in the production and export of both natural gas and liquid petroleum. Recent years have seen a dramatic increase in Russian oil output, bringing it to levels not reached since 1992.

Russia now ranks second in the world as an exporter, just behind Saudi Arabia. Natural gas exports have not increased as dramatically, reflecting in part the fact that the gas sector did not endure a similarly sharp decline in years leading up to and following the break-up of the Soviet Union. Russia remains the world's largest natural gas exporter.

Russia, in short, is an energy giant. But it remains in many ways a giant that has yet to test its full strength. The prompt and efficient development of its oil and gas potential will be critical if Russia is to achieve economic stability and sustained growth.

The U.S. interest in helping to develop Russia's energy sector is also plain. The United States, after all, is already the world's largest importer of petroleum. And it is not inconceivable that its imports will rise by as much as 5 million barrels per day by the end of the decade.

The United States therefore has nothing less than a vital national interest in the stable flow of reasonably priced oil to international markets. Given the potential for disruption of supply in such regions as the Persian Gulf, Africa and Latin America, we also have a strong preference for diversified supply sources. And by virtue of its large and growing production, Russia will be critical to achieving such diversification.

In no way does this mean that the United States should forgo its traditional relationships with major oil suppliers in the Persian Gulf and turn to Moscow exclusively for help in stabilizing world oil markets. The idea that Washington must pick between Riyadh and Moscow is, quite simply, a false choice. And, like all false choices, it should be rejected.

The rise of profit-oriented Russian energy companies -- particularly in the oil sector – is a cause for great optimism. So is increasing evidence -- notably the Tyumen Oil Co.-BP merger and ExxonMobil and Shell's decision to move forward with their ambitious Sakhalin projects -- that foreign investment is finally beginning to play an important role in Russia's oil and gas sectors.

But there can be no doubt that the bias against production-sharing agreements continues to hamper foreign investment. To my mind, the Duma's action last week with regard to PSAs was regrettable. Because of it, Russia will forgo many of the benefits that would flow from a more open approach to foreign investment: greater output in oil and gas, lower prices for consumers and state-of-the-art technology.

Looking forward, there are other uncertainties. Forces beyond Russia's control will continue to drive international energy -- and, particularly, oil -- markets. The ability of OPEC to maintain production discipline, as always, remains a great imponderable. A sustained, sharp decline in petroleum prices would both reduce Russian export earnings and render investment in more expensive projects less attractive.

With these important caveats, the future of Russia's hydrocarbon sector is nonetheless bright. And U.S. energy firms -- given their state-of-the-art expertise and long experience in the field -- can play a role in it. But it is also critical to look beyond the energy sector to other areas where economic ties between Russia and the United States can be deepened.

Information technology and aviation are two examples, but there is also a whole range of issues -- combating terrorism, promoting Arab-Israeli peace, addressing the threat posed by North Korea, and stemming the proliferation of weapons of mass destruction -- where U.S.-Russian cooperation will be important to success.

There can and will be differences between our two countries. For example, Russia's position in the lead-up to the war in Iraq was a disappointment to her many friends in the United States. And there may yet be contention over the disposition of Iraq's debt to Russia and the status of Russian oil concessions in Iraq, as well as Russian participation in Iran's nuclear reactor program.

But a prosperous, stable and democratic Russia at peace with her neighbors has been a top foreign policy interest of the United States since the collapse of the Soviet Union. And it remains so today, as its achievement draws closer than ever before.

Yes, economic reform has sometimes been glacial. But Russia has made huge strides in just one decade. This country's economic potential is boundless. With leadership, that potential will be realized.

It's worth bearing in mind that the stakes involved are vast -- not just for U.S.-Russian relations, but for a great nation that is taking its rightful place as a prosperous, peaceful and respected member of the international community.

James A. Baker III served as secretary of state from 1989 to 1992. This comment is excerpted from a speech he gave in Moscow on Tuesday on the occasion of the 10th anniversary of the U.S.-Russia Business Council.