Russian proliferation of advanced military, space, and nuclear technology to China, India, and the Middle East is neither recent nor novel. In fact, the Russians have engaged in such trade throughout most of the Cold War. Three things, however, are new and are pulling mightily at U.S. policy makers. First, American expectations of Russian behavior -- given U.S. direct and indirect aid to Moscow -- are much greater than at any time during the Cold War. Second, U.S. apprehensions of Moscow's trade with hostile or unstable nations in nuclear, chemical, biological and missile items are at an all-time high. Third, Prime Minister Primakov's rise, his Russian nationalist supporters, and their strategic rationalizations for Russian arms proliferation suggest overt hostility to the security interests of the U.S. Most of these rationalizations are, to be sure, quite fanciful. Expanded Russian military sales (which represent nearly 80 percent of all Russian industrial exports) axe being promoted in hopes of not just revitalizing Russia's military industry, but Russia's civilian sector- China's need for military goods to keep pace with Taiwan will lead it to buy Russian systems and create a new balance of power in Asia that will favor Russia. Nuclear and military sales to China's arch rival, India (together, these two countries buy nearly 80 percent of Russia's new military production), might be harmonized by the creation of an Indo-Chinese-Russian strategic triangle. Selling Iran arms and missile and nuclear technology will prevent Iranian support for Islam in Russia, increase Moscow's political influence in South- West Asia and North Africa, fulfill Russia's obligation as a weapons state to promote nondiscriminatory nuclear cooperation, and possibly afford Moscow military bases in the Persian Gulf.

These novel arguments are disturbing. Yet, basing U.S.-Russian nonproliferation policy in reaction to them is unlikely to serve U.S. security interests without far greater consideration of what has been at their root and that has persistently prompted previous proliferation -- the continued, excessive militarization of the Russian economy. In fact, it is this militarization that is as much a cause as an effect of Russia's current policies. As long as Russia's economy stays as militarized as it is, Russian citizens and officials will promote and rationalize ever riskier arms, aerospace, and nuclear trade merely to keep Russians employed and existing power relationships within Russia in tact. However attractive U.S. sanctioning of dangerous Russian exports and U.S.-Russian threat reduction efforts may be, then, neither are likely to be effective unless and until they are made part of a much larger long-term effort to prompt Russia to restructure its economy.

In fact, the Russian economy is still far too focused on its military. In 1991, Russian arms experts estimated that over half of Russia's industry was supporting military-nuclear activity or production. Unfortunately, this figure has hardly changed as Russia's economy has shrunk. At the same time, the relative importance of reported and illicit Russian arms, space, and nuclear exports to Moscow's overall hard currency earnings has remained quite high -- between 10 and 20 percent -- even as the dollar value of these exports has fallen. In short, Russia became addicted to military production during the Cold War and it has yet to shake the habit.

Even the precipitous decline in domestic demand for military and nuclear goods since 1991 has done little to force economic restructuring. Instead of truly demilitarizing, these sectors of Russia's economy have simply been downsized in proportion to the Russian economy's decline. Their continued need for capital has been supplied through an increased reliance on exports and domestic barter style subsidizes orchestrated through Moscow and the centralized banking system. While exporting arms and nuclear technology brings these sectors of Russia's economy hard currency, their access to Russian energy and agricultural goods at discount prices or at advantageous rates of barter exchange, affords them further support. The industry's hard currency earnings (along with others Russia might gain through energy exports and foreign bond sales and bank transactions), in turn, are useful in financing additional exports to nations lacking sufficient cash (either directly or indirectly through the servicing of untied loans).

Such subsidies of Russia's military-nuclear sectors, however, comes at a cost. First, it encourages Moscow to keep the agricultural and energy sectors under State control, which prevents these nonmilitary sectors from achieving their true profit potential. The Russian natural gas firm of GAZPROM (which earns roughly one-third of Russia's hard currency), for example, is controlled by the government. Second, fierce competition from foreign arms manufacturers over a shrinking international market has encouraged Russian exporters to offer ever higher technology versions of their goods for less. This, in turn has prompted them to retain their most talented and highly educated Russian workers as long as possible. Rather than exploit their best and brightest to move Russia into truly profitable, peaceful service industries, Russia has shackled them and its future to military production and exports.

These economic distortions go a long way to explain both Russia's current economic woes and its inane proliferation policies. As such, they must be kept in mind when devising effective sanctions and programs to reduce the threats they pose. In specific, Russia's skewed economic incentives suggest the need to pay greater attention to:

--Targeted trade sanctions against Russian proliferators and their future limits. Certainly, the U.S. needs to make itself clear not just in words, but in deeds about what Russian weapons-related exports are unacceptable. By not sanctioning those Russian entities who clearly were involved in helping Iran's missile programs and who clearly would have something to lose if sanctioned (e.g., the Russian Space Agency), the U.S. risks encouraging cynicism about its nonproliferation concerns. That said, U.S. officials also need to recognize that in the future the opportunity to effect Russian behavior will be increasingly difficult. Because Russian managers, particularly in the space and nuclear sectors, are desperate for U.S. hard currency trade (worth more than $500 million per year) they will do whatever is necessary to create cutout entities that cannot be hurt by U.S. sanctions (i.e., ones other than those U.S. industry works with or that receive U.S. government aid). Thus, in the future, U.S. trade sanctions will be unlikely to leverage Russian behavior unless U.S. officials are willing to impose them against Russian entities whose proliferation culpability is unclear (or nonexistent) and do so even though it might destroy these firms and directly harm their U.S. partners.

--Checking potentially dangerous Russian financial transactions in the U.S. and West. As noted above, hard currency is not only critical to sustaining Russia's military-related industries, but to financing their exports to cash-strapped customers. Perhaps as important as cutting off trade with proliferating entities, then, is making sure that U.S. private capital is not used to support such activity. In November of 1996, the Russian government was allowed to sell $1.8 billion in bonds in the U.S. and Europe. All of this money was given to Russia up front in a lump sum, free of conditions to use as it saw fit. Since November of 1996 Russia has developed a new intercontinental ballistic missile and sold reactors, advanced military goods and missile technology to Iran, Iraq, India, China, and Syria.

Meanwhile, Russian officials announced that they would use a portion of the recently announced IMF loan of $17 billion to avoid default on these bonds. Perhaps even more important, Russia has tried to use GAZPROM (a largely state-owned monopoly that has been headed by former prime minister Chernomyrdin) to enhance the energy earnings of their weapons customers Iran, Iraq and Syria and have tried to finance these efforts through similar bond sales on the U.S. market. Thus, October of 1997, GAZPROM announced it would violate the Iran-Libya Sanctions Act and help Iran develop Iran's off-shore gas fields. It was scheduled to issue $3 billion in bonds in the U.S. in November of 1997 (and was expected to follow with $10-18 billion or more in additional bond offerings on world markets) when public exposure forced Goldman Sachs to withdraw the offering. More recently, last December, GAZPROM announced plans to violate UN weapons sanctions against Iraq through the construction of an oil pipeline from the Iraqi oil field at Kirkuk to the Syrian port of Banias. As with Iran, such development would net Iraq additional hard currency earnings that could be used to buy more Russian arms. As of now, GAZPROM is still free to raise money in U.S. debt and equity markets to help finance this undertaking.

--Making sure our nuclear cooperation doesn't literally fuel more proliferation. As noted above, care must be taken to make sure U.S. hard currency transactions do not help Russian military-related industries to support production or finance more exports. This is equally true of U.S. cooperation with Russia's state-ran nuclear sector, run by Minatom, which is working on several reactor projects in Iran. There is a concern about what Minatom might be doing with the hard currency it receives from the sale of reactor fuel made from blended-down weapons uranium. There also is an uncertainty about whether or not U.S. cooperation in disposing of Russian weapons plutonium might help Russia produce more. The U.S., in fact, has begun paying Minatom and the Russian Finance Ministry for the equivalent of 500 tons of highly enriched uranium (worth a total of $12 billion). Where these funds go and what they pay for is of no small moment. If they go to environmental clean up, encouraging increased nuclear safety, are dedicated to reactor decommissioning or the development of more economical forms of nonnuclear electrical production, it would all be for the good. Unfortunately, U.S. officials currently have no idea if this is the case. Similarly, the U.S. is about to embark on a costly nuclear cooperative venture to convert Russian weapons plutonium into reactor fuel. The hope is that this will reduce Russian plutonium stockpiles. There are concerns, however, that this effort might serve to revitalize Russia's breeder reactor program, which would increase Russia's plutonium holdings. Such risks need to be avoided. Instead, any U.S. nuclear cooperation that brings in billions of dollars to Russia must assure that the money is properly spent. It certainly should not be allowed to fuel Russian militarization or proliferation. One such arrangement, currently being discussed, would have foreign utilities pay Russia billions for temporarily storing foreign spent fuel but condition how this money would be spent and how Russian surplus plutonium would be disposed. Private efforts of this sort suggest what's possible and deserve greater attention. --Getting more Russian experts to work in the U.S. and more U.S. experts to work with their counterparts in Russia. Recent U.S. General Accounting Office analysis has highlighted the shortcomings of U.S.efforts to put weapons scientists in Russia to work on civilian projects. Poor U.S. oversight has allowed monies to be spent to employ Russian scientists that have little or no weapons expertise and to support commercially unviable projects. In short, too much emphasis has been given simply trying to "touch" as many Russian scientists as we can with money and paying and trusting them to keep themselves busy where they are. In many cases, U.S. hard currency has gone not to the scientists but to Moscow (in the form of taxes) and Russian weapons laboratories where these scientists work. If the U.S. wants to prevent Russian weapons from helping potential U.S. adversaries, this approach will not work. Instead, more needs to be done to identify the key people in Russia's strategic military-nuclear industrial sectors and to draw them into joint private ventures that would either pair them with American experts that would work directly with them on long-term civilian projects in Russia or that would bring them to do such long-term work in the U.S. and the West. This might demand changes to existing visa policies in Russia and the U.S. and require the extension of tax credits (or other incentives) to participating U.S. firms but anything less risks supporting the very activities we wish to repress.

--Making it easier and safer for the private sector in the West to invest in Russia's energy sector and to employ Russia's highly educated work force. If Russia is to restructure and demilitarize its economy, it will need more not less foreign capital, along with new work for its educated workers. But this cannot happen unless Russia changes the way it does business. At the moment foreign investments are repressed and made risky by blind bidding and excessive Russian government controls. Instead, foreign investors should insist on Western financial and commercial practices as a condition of their investing. This would include greater transparency and classic project finance transaction practices (including independent expert on-site inspections of each project, progress payments, collaterized accounts in the foreign lenders name etc.). In addition, foreign investors must be allowed a much greater hand in managing the firms they invest in. As for Russia's workers, Moscow needs to allow its best minds to supply services to foreign firms much as Indian computer experts do today via the internet for U.S. software manufactures. Combined with earnest efforts to open its economy to foreign investment, encouraging its educated workers to provide services directly to private firms, will only hasten Russia's ability to restructure its economy, develop a convertible currency, and demilitarize. --The exaggerated emphasis we place on who is ruling Russia. None of these undertakings can be accomplished overnight. Most will require efforts that would have to be sustained far longer than any single Russian or U.S. government is likely to last. Our proclivity, of course, is to place too much stock in who is currently ruling in Russia and to let this guide our policy. Until Russia's economy is truly demilitarized, though, we would do far better by sticking to a consistent policy informed by the points above. We need to be vigilant to prevent the worst but optimistic enough to assure Russia's struggle with democracy and market economy succeeds.