The Rap On Russia.

Russia is an economic mess, but it is not a threat to the West.

Editor's Note: Over the past decade, Philip Merrill has made several trips to the Soviet Union and, after its breakup, to Russia, where he has met with top government officials. The following is a summary of his observations about the state of the Russian economy, military, political system, and mindset:

The Russians export nothing that is competitive in world markets except natural resources. About $15 billion in extra oil revenues this year has drifted into the sand, or Swiss banks. It has had no impact whatsoever on the economy, continued privatization, or the payment of Western debt. There is no point in giving or lending the Russians any money, through international organizations such as the International Monetary Fund or otherwise, because doing so has no effect.

The Russian GDP is about the size of Belgium and not improving much. It is almost impossible for foreigners to invest in the country because there is a lack of effective laws or enforcement of contracts. There are no real banks in Russia because there is no way to collect debts or deal with bankruptcy. The Russian authorities are very much aware of this problem.

There is a very significant underground economy, but it is hard to measure. Hernando de Soto, the economist who has written extensively on the underground economies in South America, would be a good resource for understanding the current situation in Russia.

The Russians are scared to death of China. "Intimidated" is the proper word. The Chinese economy is much larger than Russia's and growing larger every day, while the Russian economy stagnates. The Russian perception of China is summed up in a single word, "bogeyman" which is an old Russian appellation for Chinese. The two countries share a very long border that is barely defended. Very few Russians live near the border, but large numbers of Chinese do. There is a lot of history--and tension--along that border.

The Russian oligarchs are very bright. Most of the ones I have met understand free market concepts. By far, the best U.S. policy toward Russia is to waltz as many of their young business leaders as possible around the United States and Western Europe. Programs run by the State Department and its U.S. Information Agency (USIA), Eisenhower fellowships, and the many people-to-people exchange programs the U.S. government sponsors are the proper diplomatic instruments for us. Over the long run, such exchange programs, which expose young Russian leaders to the basics of a free-market economy, will pay off in bigger dividends than any conceivable financial arrangements.

By comparison with any other Third World economy, Russia has a remarkably well-educated population, particularly in the hard sciences. If marketplace economics can be established, the Russians will find places to compete effectively, even if we cannot define precisely where at this time. What is required is more of a bottom-up process and less of a top-down one. Of course, that's a lot easier to say than to do.

Russian President Vladimir Putin and his associates comprise a transition government. This will be the last Russian administration whose leadership has extensive roots in the KGB, Gosplan, and the other organizations of the former Soviet Union. Whether Putin represents two steps forward and one back or vice versa is less important than the nature of the next crowd that takes over. Of course, they will be rooted in Russia, but we also want them rooted in freedom of information, marketplace concerns, and the rule of law.

Some of Putin's advisers are very free-market oriented. Whether Putin listens to them is perhaps less important than the political fact that he feels required to have some such body of thought going in one ear even if much of it goes out the other.

The time Putin spends abroad is the foreign policy equivalent of a Potemkin Village. They were a great power. They think they should still act like a great power. But there is nothing behind it. Going around the world meeting other important leaders is what the head of a great power is supposed to do. But these diplomatic missions have little significance if neither the Russian military nor its economy has much substance.

Moreover, all the time Putin spends abroad detracts substantially from the time that he should be devoting to his country's immense domestic problems. There is only so much executive time available. Putin is wasting much of his on pointless overseas travel.

In meetings with Russian officials, I have been struck by how remarkably little discussion there is about military issues. When the Nunn-Lugar programs for dismantling nuclear weapons and other issues associated with the degradation of weapons of mass destruction are raised, it is more in the context of discussions about environmental concerns than military-related matters. The extent to which the Russians recognize the sorry state of their military--conventional and non-conventional--and their economy was striking.

We should reduce our nuclear arsenal from the present number of about six thousand to between one and two thousand, which is all that is necessary to ensure that no other country can even think about challenging us in this arena.

The Russians will follow because they cannot afford to maintain their present stockpile. If they do not follow, it makes no difference in a post-Cold War world. The cost would be just a further hit at their economy. No arms control is needed for this. Indeed, the idea of arms control keeps the nuclear weapon level unreasonably high because each side wishes to use them as bargaining chips. This is absurd.

Why are the Russians dealing with such Third World troublemakers as Iran, Libya, and North Korea? The answer is less a desire to stick fingers in our eyes than the fact that they have long relationships with these countries. Some of them are the only customers for Russian arms. But even their arms industry, good though it is, would operate at a substantial loss in a real marketplace economy. Their costs are so high because of overstaffing, excess capitalization, and terrible logistics that the more they manufacture, the more they lose.

The Russian government displays no interest at all in reassembling the southern tier of Muslim countries of the former Soviet Union, but it shows considerable concern about terrorism and migration.

Over the long term, the aim of U.S. policy should be to construct a framework in which it is easier for the Russians to do business with the West than with anyone else. They may veer toward or away from authoritarianism, but they do know, as we do, that it will not work.

The bottom line: Russia is a Third World economy with a government that still considers itself a First World power. But the Russians no long constitute a military threat--to their immediate neighbors or to us. The job of U.S. policymakers over the next few decades is to fully integrate Russia (and China) into the community of civilized nations to the maximum extent possible. The best way to do this is to provide a lot of technical and moral support. But we should avoid any new financial support. The money will fly out of the country as quickly as it comes in. At this point, what the Russians need is a lot of handholding. That's about all we can do.

Philip Merrill is Chairman of the Board of Capital Gazette Communications, whose publications include the Annapolis Capital and Washingtonian magazine. He was Assistant Secretary-General of NATO from 1990 to 1992. He has served five administrations in the Departments of State and Defense.