#22 - JRL 9117 - JRL Home
Moscow Times
April 11, 2005
The World Needs a Strong Russia
By Alexander Vershbow
Alexander Vershbow is the U.S. ambassador to Russia. He contributed this comment to The Moscow Times.

It goes without saying that the economic dimension of the U.S.-Russian relationship has tremendous potential for mutual gain. What needs to be said is something more obvious: Russia's economic future depends upon Russia's own choices. After six years of brisk economic growth, Russia stands at a crossroads: It can either revert to a statist economic model and fall behind its peers, or adopt an outward-looking, market-oriented economy and be positioned to integrate and prosper in the global economic system.

We hope that Russia chooses the path of integration. However, integration is more than a matter of joining major international economic organizations. It means that businessmen in Tomsk and Tulsa are able to compete for business on an equal footing. It also means a supplier in San Diego is just as likely to win an order from a wholesaler in St. Petersburg as is a merchant in Saratov, if the Californian can offer the best product, price and service. In other words, integration creates an economic environment that allows entrepreneurial skill to flourish, which leads to better products, better prices, better service and more jobs.

This is the future that all friends of Russia -- and, we believe, the Russian people themselves -- want to create. America wants to see a strong, democratic Russia, not only because such a Russia would be a more reliable international partner and a model for other states in the region, but also because such a Russia would be able to support increased economic ties between our two nations. Basic economics tells us that both the San Diego supplier and the St. Petersburg wholesaler gain by doing business together, so our governments ought to be in the "business" of maximizing these exchanges.

In short, increased bilateral economic activity is a win-win proposition for the American and Russian people, not a zero-sum game as some portray it. However, in order to realize such a future, Russia needs to make progress on unfinished structural initiatives: streamlining the government bureaucracy, natural monopoly reform, building the rule of law and rooting out corruption. While the work required to accomplish these tasks is not glamorous or always popular, without it the country will never realize its full potential.

Bemoaning such fundamental problems will not make them go away. I would like to mention two areas in which we believe deeper engagement with Russia can lead to positive results: World Trade Organization accession and the energy sector. At their February meeting in Bratislava, President Vladimir Putin and U.S. President George W. Bush singled out both as areas of special interest.

The United States supports Russia's bid to join the WTO. Our negotiators are currently working to conclude a commercially fair, mutually beneficial package that would facilitate Russia's entry into the global body. To reach agreement, Russia must make some hard decisions. It will need to curb strong protectionist forces, especially in the agricultural, aircraft and financial services sectors. Moreover, Russia needs to do far more to protect intellectual property rights, or IPR -- in particular, cracking down on the rampant piracy of CDs, DVDs and computer software. Russia has enacted stricter IPR legislation, but it still has a long way to go toward enforcing such laws. Strong IPR protection is a key pillar of any modern economy and is crucial if Russia wants to unlock the productive capabilities of its most valuable natural resource, its people.

I am convinced that by adopting WTO rules, Russia will rationalize its laws and regulatory standards -- in turn, providing investors with greater certainty, predictability and transparency. Russia has passed a majority of the legislation necessary for accession, but key pieces of legislation on issues such as subsidies and customs valuation have not yet gone to the State Duma. Progress on WTO accession remains subject to Russia's decisions and depends, to a large extent, on the time frame it sets for accession. As Bush reiterated in Bratislava, the United States is committed to working with Russia. Both our presidents voiced their desire to conclude our bilateral negotiations this year.

The energy sector is another example of a potential win-win situation. U.S. companies can bring the capital, technology and experience needed to tap many of Russia's oil and gas fields, especially those involving challenges never before encountered by Russia's own industry. Russia's companies stand to gain as revenues increase, while the government's coffers would further swell with tax receipts. However, while there have been many discussions of possible deals in this sector, we have seen far fewer agreements concluded than we had hoped for. Developing the full potential of our energy relationship will require Russia to make some long-overdue decisions concerning constructing pipelines, developing Russia's liquefied natural gas, or LNG, capability, and establishing a more stable and transparent investment environment.

Recently, we have seen positive signs on this front: U.S. company ConocoPhillips concluded a strategic alliance with LUKoil; Gazprom is in serious discussions with foreign partners regarding LNG projects; the Russian government has decided to expand the pipeline infrastructure; and a new law on subsoil will likely be in place soon (although we believe some of the language in the current draft regarding foreign companies detracts from what is otherwise a quite market-friendly initiative). Unfortunately, the uncertainty created by the dismantling of Yukos, as well as the move toward greater state control in the energy sector, undercuts these positives. While each country has the right to decide how best to manage its natural resources, Russia must realize a restrictive regime can have a high cost. In this case, the cost is a reduction in foreign and -- even more worrisome -- domestic investment.

I use the WTO and the energy sector as examples not only because we view movement on these issues as indicators of Russia's commitment to fostering closer economic ties, but also because if Russia can make progress on these issues, then the country will be that much closer to attaining the economic success of its G8 partners. Progress means setting up a rules-based system that creates the incentive for private companies to do business without fear of government capriciousness. Progress would be reflected in the fact that Russia would no longer bring in only a small fraction of the foreign direct investment that economies of similar size do. While Russian policymakers may debate about the optimal level of state involvement in the economy, there should be no debate about the fact that the arbitrary application of the law is the surest route to economic ruin. In this vein, it will indeed be positive news if, following on Putin's recent comments, Russia passes legislation shortening the statute of limitations on privatization reviews from 10 years to three and legislation circumscribing the tax authorities.

Let me say again that it is in the U.S. interest that Russia become a strong economic power, fully integrated into the global economy. Both the U.S. and the Russian economies will benefit from that outcome, as will the broader U.S.-Russian relationship. We will continue our work to achieve that goal and, we hope, realize the enormous untapped potential in our economic relations in the years ahead.