The Foreign Service Journal, December 2016

THE FOREIGN SERVICE JOURNAL | DECEMBER 2016 33 other post-Soviet nations seek stronger economic ties with the United States, Europe and, increasingly, China. This presents both opportunities and challenges for U.S. policymakers, who should further integrate economic and com- mercial diplomacy into the policy playbook. Russia: One Step Forward, Two Steps Back At independence in 1991, Russia was well positioned given its geography spanning two continents, its natural resources and its well-educated workforce. However, a bungled economic reform effort in the 1990s, combined with catastrophic drops in GDP, largely discredited free market principles. As one observer noted about the economic “shock therapy” of the 1990s, “It’s all shock and no therapy.” Market economics, freedom of the press and freedom of speech became code words for Western deprav- ity, against which Mother Russia would protect its citizens. This lack of political and economic development spawned the rise of Putinism, permeating all levels of society. During his tenure as president from 2008 to 2012, Dmitry Medvedev understood the challenge: the urgent need to mod- ernize, with a focus on the economy. The United States sup- ported Moscow’s efforts at global economic integration, using significant political capital to help secure Russia’s accession to the WTO, cancel the outdated Jackson-Vanik Amendment and encourage bilateral economic cooperation, in a strategic effort to give Russia a stake in the global economy and inoculate it against its historical xenophobic tendencies. But every transac- tion needs a buyer and a seller; and as Russia turned increas- ingly inward, Moscow was not buying. The Khodorkovsky Affair of 2003 was later recognized as the defining case study of Putinist Russia, which can be summarized as “oligarchs, you can make and keep your money, but don’t even think about getting into politics.” The Russian economy of today bears striking similarities to the 1980s: low oil prices reduce hard currency inflows; large state investments in industry bring little real return; Western sanctions followed by counter-sanctions on U.S. and E.U. agri- cultural products produce more domestic inflation; sanctioned Russian banks are unable to roll over significant dollar and euro debt—the list goes on. Even more troubling is the increasing emigration of Rus- sia’s best minds, drawn to economic opportunity in the West. Russia’s darkening political landscape and lack of innovation do not bode well for its economic outlook. Still, its considerable resources—human, natural and scientific—will help if, someday, Russia decides to seriously refocus on the economy. Ukraine: A Test Case for Large-Scale Economic Reform in Eurasia At the dawn of independence in 1991, many observers believed Ukraine had the best chance of success among all non-Russian former republics. Its proximity to European markets, developed rail system and ports, agricultural bounty, and educated work- force made Ukraine a smart bet. However, a combination of weak state institutions and a corrupt political elite led to a semi-func- tioning state at best. Case in point: in 1991, Polish and Ukrainian GDP were roughly equal. Today, the Ukrainian economy is about one-third the size of its western neighbor, now an E.U. member. After more than two decades of kleptocracy on a massive scale, in November 2013 the Ukrainian people said “enough.” While fighting Russian aggression in the East and economic losses due to Russia’s illegal occupation of Crimea, in 2014-2015 Kyiv launched a battle against corruption and cronyism, leading to a courageous decision to implement painful but necessary economic reforms. With significant U.S. and European support, Ukraine has made major strides, achieving improved corporate governance, reduced dependence on Russian gas, accession to the World Trade Orga- nization Agreement on Government Procurement, a public dec- laration of assets of government officials and the establishment of a new police force. The country has arguably made more progress on economic reform in the past two years than during the previous 25, but remains a critical test case for reforming a dysfunctional economy and developing strong, transparent institutions in a more or less free market economy. The Caucasus, Moldova and Belarus: A Mixed Picture In the 1990s, Azerbaijan’s significant hydrocarbon resources and smart energy transportation policy development gave the country an economic boost. U.S. support for the East-West energy corridor provided political space and real dollar returns, tripling Azeri per capita GDP by 2011. Boxed in by a frozen conflict in Nagorno-Karabakh and powerful neighbors in Iran and Russia, the late President Heydar Aliyev masterfully played a weak hand, leveraging the country’s oil and gas resources to secure indepen- dence. But predictably, “Dutch disease” set in, with petrodollars and corruption crowding out real economic development. Faced with a devalued Azeri manat , a rising cost of living and domes- tic unrest, the Baku elite took initial steps at economic reform. Increased use of e-government and tax reformmeasures have sought to reduce corruption, but much remains to be done. Con- tinued low oil prices can provide an impetus to pursue broader economic reform, but the deep-rooted interests of powerful elites