You've seen the food lines on TV, but the problems run much deeper. A friend and software developer from St. Petersburg writes: "The tragedy is that we have an entirely communist government playing with the form of a market economy while actually continuing the policy of state monopoly. They make conditions unbearable for every entrepreneur who wants to run a really private business. They declare foreign trade liberalization, but castrate it with the enormous power of officials to prohibit trade. Their price liberalization, without even the shadow of an active privatization process, is nothing more than a right granted to the state monopoly to raise prices without limitation. The social situation is explosive. Half the city's population can afford no food but bread, so the consumption of bread has risen dramatically. The bread lines are now fantastic even by our standards. Only the old Russian tradition of moving slowly keeps us from uncontrolled riots. General Rutskoi, our Khomeini, waits in the wings."
The media's comparisons of the Russian and western economies are ridiculous. The USSR was an armaments factory inside a vast military compound. And little else. Without a cold war mission to keep it glued together, the former Soviet Union, to borrow Secretary of State Baker's apt phrase, is on the brink of becoming a "Yugoslavia with nukes."
What to do? As always, Washington's policy-makers are gridlocked. One side says we should do nothing at all. They contend that the ex-Soviets are to blame for the mess they're in, and that the chances of a trigger-happy Russian fascist coming to power are overblown. Besides, they argue, the Russian government would only waste any money we give them, and we need those scarce funds to fix problems at home.
The other side calls for a massive -- $30 billion a year -- foreign aid program. According to these folks, aid given right now may be our last chance to save the benign Yeltsin regime and head off the chaos and civil war whose nuclear fallout will poison the entire global village. Besides, they point out, $30 billion is just 10% of our annual defense spending.
What's profoundly troubling is that both sides keep hammering on each other instead of hammering out a viable compromise. Such a proposal, which began circulating last June, calls for the creation of an American-Russian Investment Insurance Corporation (ARIIC). As it does for Ginnie Mae and Freddie Mac, the federal government would guarantee the liabilities of ARIIC. Enabling legislation would authorize guarantees of up to, say, $15 billion in each of the next five years, unless the program is suspended by a two-thirds vote of Congress.
Any U.S. citizen or corporation investing in a private business in Russia could reduce its risk exposure by purchasing an investment insurance policy from ARIIC. For example, an American investor putting $1 million into a Russian business would pay a one-time $50,000 premium for $500,000 of five year term insurance. No investor would be allowed to insure more than half of a potential loss. And, only if the loss exceeded the uninsured half of the investment would ARIIC reimburse the policyholder for losses up to the policy limit.
If fully implemented, $150 billion would be invested in Russian enterprises over five years. Every penny would be private capital going into private ventures. On policies worth $75 billion, ARIIC would collect $7.5 billion in premiums. In the worst case -- assuming every single deal went belly up -- the maximum total exposure to U.S. taxpayers would be $67.5 billion -- less than a 2% increase in the federal debt.
Once ARIIC was set up, the Russians would have to meet just one condition to launch the program -- completely legalize private property. Yeltsin, like Gorbachev before him, talks a lot about privatization, but so far nothing has actually happened. The state still owns everything. The apparatchiks are still firmly in control. Genuine economic growth cannot begin until the first rule of market economics -- the right to buy and sell property -- becomes Russian law. With every powerful interest in Russia still set against real capitalism, there is virtually no chance for a peaceful turnaround -- unless the U.S. tips the historic balance by offering a $150 billion carrot.
ARIIC would accelerate the rebirth of Russian enterprise by allowing investors to reduce their risk/reward ratios in a new marketplace of enormous potential but tremendous obstacles. Without question, a substantial portion of invested funds would go to pay for exports of U.S. goods and services -- everything from architectural services to food processing equipment to computers and telecommunications gear. In a time of intensifying competition with Japan, America has the opportunity to turn a defeated enemy into a strategic business partner and a major customer for high-tech goods. But to make that happen, we have to help put that customer into business.
Unlike the bureaucracy-to-bureaucracy aid plan, ARIIC's private-to-private investments would create millions of new jobs and thousands of new companies in both Russia and America. Investors, not government officials, would disburse the cash. And because losses would hit investors first, they'll have plenty of incentive to use their capital wisely.
Some purists will argue that U.S. taxpayers should never subsidize private risk. But they forget that ARIIC is also our best possible national security buy. Over five years, an incredibly dangerous situation can be defused while risking less than $70 billion, about 5% of the $1.25 trillion we'll be spending on defense during the period. Once ARIIC begins working, we could even recover any insurance fund losses by accelerating the ramp-down in military spending.
ARIIC's concept works and the numbers work. Every business person who's heard about ARIIC knows it makes sense. Maybe that's why ARIIC isn't even being discussed in official Washington. So far at least, only Yeltsin's people are talking about ARIIC's potential to help the world squeak through an extremely tricky post-cold war transition. Maybe it's because they know who'll be first to pay the price when Russia comes unstuck.