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Johnson's Russia List


August 22, 1999    
This Date's Issues: 3456 • 3457 

Johnson's Russia List
22 August 1999

[Note from David Johnson:
1. Itar-Tass: Yeltsin Pins Great Hopes on Putin, Spokesman Says.
2. The Independent (UK): Helen Womack, 'Primakov phenomenon' spells 
trouble for Yeltsin.

3. Itar-Tass: Fatherland Congress Changes List of Candidates for Duma.
4. New York Times: Timothy O'Brien and Raymond Bonner, Russian 
Money-Laundering Investigation Finds Familiar Swiss Banker in the Middle.

5. The Guardian (UK): Tony Thompson and Paul Farrelly, Russian mafia 
target the City. Fury in Britain as US leak blows investigation into 
money-laundering link with world's most wanted man.

6. The Times (UK): Michael Binyon, Russian bear falls to beer imperialism.
7. Paul Backer: Searching for a sensible post-Clinton foreign policy in 
Eastern Europe.

8. Paris' Le Monde: Michel Camdessus, director general of the International 
Monetary Fund, "The IMF, Russia, and Le Monde" 

9. Itar-Tass: Communists Seek to Win Orthodox Believers Over for Polls.] 


Yeltsin Pins Great Hopes on Putin, Spokesman Says.

MOSCOW, August 21 (Itar-Tass) - President Boris Yeltsin pins great hopes on 
Prime Minister Vladimir Putin, presidential spokesman Dmitry Yakushkin said. 

Yakushkin told the Ekho Moskvy radio station on Saturday that the president 
had an opportunity to assess Putin's performance when the latter worked as 
deputy mayor of St. Petersburg and then as secretary of the Security Council 
and Federal Security Service director. 

The decision to appoint Putin as prime minister "was not spontaneous. It was 
ripening for a long time". 

Among the new prime minister's strongest qualities the president has named 
"firmness and independence", the spokesman said. 

"But these qualities should be tested, and people should believe Putin and 
express their support at the presidential elections," he added. 

He noted that now the prime minister "is not thinking about presidential 
plans" since he is preoccupied with current problems -- the North Caucasus, 
the petrol crisis and the payment of back pensions. 

Yakushkin pointed out that the "government under Putin is more independent", 
including in relations with the presidential administration. 

"There is no paradox here: on the one hand, it will be a normal working 
contact; on the other hand, it's firmness, independence, decisiveness and 
consistency," he said. 


The Independent (UK)
22 August 1999
[for personal use only]
'Primakov phenomenon' spells trouble for Yeltsin 
By Helen Womack 

VADIM LEVIN, the American-educated head of Uniex Direct, which uses junk mail 
to sell health products in Moscow, plans shortly to suspend all his 
commercial operations. Instead he will work full-time and without pay for 
Fatherland-All Russia, the new force on the Russian political scene.

Why was he doing this? Had he reason to be grateful to Yuri Luzhkov, the 
mayor of Moscow and one of the principal figures behind the bloc? No, said Mr 
Levin, he was doing it from the heart, because he believed that with the new 
party, Russia had "a future as a civilised country".

Formed by Mr Luzhkov and Russia's regional governors, Fatherland-All Russia 
already posed a significant threat to Boris Yeltsin, but its influence 
expanded hugely last week, when the country's most popular politician, 
Yevgeny Primakov, agreed to come on board. Only a masterful player like the 
ex-prime minister, said the commentators, could have afforded to keep such an 
extended silence on the Russian political stage, a silence Mr Primakov 
finally broke on Tuesday, when he announced that he was committing himself to 
lead the new party. Pausing only to change metaphors, the commentators began 
speaking of a transformation of the country's political landscape.

It is certainly true that, for the first time, a credible challenge to Mr 
Yeltsin has appeared. He may be ailing but he holds the levers of power and 
has seemed, lately, to rule Russia by whim. However, in a country so vast, 
burdened and slow-moving, it is perhaps unwise to use the word transformation.

Unwelcome as was the alliance between Mr Primakov and Fatherland-All Russia, 
it did not come as a surprise to Mr Yeltsin, who has shown he is concerned to 
hand over power to someone he can trust. After the former premier, Sergei 
Stepashin, failed to prevent the Kremlin's enemies from creating the bloc in 
the first place, Mr Yeltsin launched a pre-emptive strike by naming the 
former security services chief, Vladimir Putin, 46, premier and favoured 

In the thin-lipped, cold-blooded young officer, whose watchword is 
"discipline", the Russian media detected a physical and ideological 
resemblance to the late Communist Party General Secretary, Yuri Andropov. 
Journalists already fancied they saw a likeness between Mr Primakov, nearing 
70 and shaggy of eyebrow, and the late and retrospectively loved Leonid 

If presidential elections go ahead next year, though weary Russians are far 
from certain, given Mr Yeltsin's "categorical" promises not to cancel them - 
might we see a race between two General Secretary lookalikes? Is that what 
they mean by transformation?

After all the shocks they have experienced in recent years, Russians would 
appear to have more nostalgia for the stagnation of Brezhnev's rule than for 
the austerity of that of Andropov. The fact that Mr Primakov, after pulling 
Russia back from the brink last autumn, did little in his eight-month tenure 
as premier seems to account for the fact that for weeks he has topped the 
popularity ratings.

The press called it the "Primakov phenomenon". Politicians of all stripes 
were desperate to co-opt the former spy master and foreign minister, whose 
involvement with any party was seen as a guarantee of its success at the 
parliamentary elections in December. Success there is the key to the Kremlin 
next year.

Mr Primakov remained as mysterious as a sphinx until his announcement that he 
had accepted an invitation to run with Mr Luzhkov and the regional governors. 
He would chair their bloc's co-ordinating council and take the first position 
on their candidate list. At Moscow's House of Writers he said he had not been 
playing for attention, but taking time to "reflect, meet people and hear 
their opinions, which matter to me". If the pensioners who had tried to get 
into the packed press conference had heard him, they would have melted.

This weekend in Ufa, capital of the Volga region that is home to the Bashkiri 
ethnic group, Fatherland-All Russia is holding a congress to underline the 
message that it embraces not only privileged Moscow but also the impoverished 
provinces. As a formality, the grassroots must endorse Mr Primakov, but since 
he is already blessed by Mr Luzhkov, Vladimir Yakovlev, governor of St 
Petersburg, and Mintimir Shaimiyev, president of Tartarstan, that is a 
foregone conclusion.

Last week the usually media-shy Mr Primakov expounded a comforting vision of 
Fatherland-All Russia as a broad church uniting all people of common sense 
and goodwill who were committed to seeing Russia "powerful, democratic and 
flourishing". Russians did not deserve poverty and chaos, he said, arguing 
that only consensus could rescue the country.

Asked if he had presidential ambitions, he said he could say, "without 
twisting my soul", that he had not decided yet and it would depend on whether 
he felt the people wanted him. Asked how he and the Mr Luzhkov would work out 
which of them should be the bloc's presidential candidate, he said: "We will 
reach an agreement." His sights were set, for the time being, on the 
elections to the State Duma. Afterwards, it was important that a new 
government was formed on the basis of the majority in parliament. Only in 
that way was it possible to avoid "catastrophic changes of government".

He proposed changes to the 1993 constitution, which Mr Yeltsin wrote to give 
himself Tsar-like powers. The head of state, Mr Primakov said, should remain 
commander-in-chief of the forces and the face of Russia to the world. But 
day-to-day powers should pass to the premier, and the post of vice-president, 
abolished when Alexander Rutskoi rebelled against Mr Yeltsin, should be 

Commentators noted that while Fatherland-All Russia, boosted by the magical 
"Primakov factor", might look unstoppable, there was plenty of scope for the 
politicians to fall out before the elections. Some said that Mr Primakov, a 
lifelong apparatchik, had more to lose by sacrificing his superiority to the 
political fray than Mr Luzhkov, a dynamic but flawed figure, who could be 
planning to use his respected colleague as a shield.

Supporters of the ebullient mayor say that even if he is corrupt, then at 
least he has allowed some benefits to trickle down to Muscovites. His critics 
accuse him of vulgarity, riding roughshod over human rights, nationalist 
tendencies and crony capitalism.

The mayor could stand for the presidency, but there is a risk he would lose. 
If, on the other hand, Mr Primakov entered the Kremlin under the proposed new 
constitution, Mr Luzhkov could become his vice-president or premier. He would 
then be set fair to succeed.


Fatherland Congress Changes List of Candidates for Duma.

MOSCOW, August 21 (Itar-Tass) - Delegates to the second congress of Moscow 
Mayor Yuri Luzhkov's movement Fatherland held a closed session on Saturday to 
discuss a tentative list of candidates from the Fatherland-All Russia bloc in 
the upcoming parliamentary elections and made some changes in it. 

Fatherland spokeswoman Natalia Mandrova told journalists that the list of 350 
candidates leaked to mass media is preliminary and subject to change, 
including by other members of the bloc. 

The final version of the list will be presented only at the bloc's 
consolidation congress on August 28. Only the top three candidates can be 
considered definitely approved, she added. 

Luzhkov expressed satisfaction with the way the discussion of the candidates 
went off. "I expected more problems and tension, but consolidation and a 
business-like approach prevailed," he told journalists during the break in 
the congress. 

He reiterated the positions of regional governors included in the bloc's 
federal list. Luzhkov and St. Petersburg governor Vladimir Yakovlev will run 
for re-election as mayor and governor respectively. 

The mayor said his and Yakovlev's appearance in the list is "indicative" in 
order to help voters to make up their mind. 

As for other governors included in the list, they have yet to decide what 
they are going to do, Luzhkov said, adding that he is "very pleased that they 
are ready top work together with the Fatherland-All Russia bloc." 


New York Times
August 22, 1999
[for personal use only]
Russian Money-Laundering Investigation Finds Familiar Swiss Banker in the 

At the intersection of illicit Russian money and the Bank of New York is
Rappaport, a Swiss banker who has had brushes with governmental investigators 
in the past and who has long had an important connection to the bank. 

Together with the Bank of New York, Rappaport owns a bank in Switzerland that 
helped provide the American bank with important business contacts in Russia, 
according to Western bankers familiar with the operation. 

And millions of dollars that were channeled through the Swiss bank, known as 
Bank of New York-Inter Maritime, are linked to what Federal investigators 
describe as possibly one of the biggest money-laundering schemes in the 
United States, according to a person close to the investigation. 

The Bank of New York, which for years aggressively sought business in Russia, 
is currently engulfed in a Federal money-laundering investigation that led to 
the suspension last week of two senior officers who oversaw the bank's 
Russian business. Federal investigators are also looking into the activities 
of their husbands, both of whom are involved in businesses that have ties to 
either Rappaport or his Swiss bank. 

The money moving through the Bank of New York-Inter Maritime raises the 
question of why the Bank of New York, a conservative institution that is one 
of the nation's oldest banks, worked closely with a man who has frequently 
drawn the attention of government regulators and law-enforcement officials 

Most recently, Rappaport's bank was sued by the Justice Department in 1997, 
to recover proceeds that the Government asserted were from drug sales that 
had been deposited in the Bank of New York-Inter Maritime on the Caribbean 
island of Antigua by a known money-launderer. A Federal judge dismissed the 
case last year, though, citing lack of jurisdiction. The Government is 
appealing the decision. 

A Boston lawyer representing Bank of New York-Inter Maritime, William Shaw 
McDermott, did not respond to requests to interview Rappaport or talk about 
the Justice Department suit. Efforts to contact Rappaport were unsuccessful. 
The Bank of New York, which is cooperating with the Federal money-laundering 
investigation, declined to comment about Rappaport. 

The interest of investigators is heightened, one official said, because 
Rappaport, who is 76 years old and lives in Switzerland, was recently 
appointed Antigua's Ambassador to Russia. Antigua, this official noted, has 
been a major center of Russian money-laundering for many years. Rappaport has 
long had close business, banking and political ties to Antigua, where the 
Government once granted him a near-monopoly on the fuel-oil market. 

Money-laundering is a legal catch-phrase that refers to the criminal practice 
of taking ill-gotten gains and moving them through a sequence of bank 
accounts so that they ultimately look like legitimate profits from legal 
businesses. The money is then withdrawn and used for further criminal 

Rappaport, who has never been convicted of any wrongdoing, is well known in 
Russian banking circles. He helped solicit business during the boom times in 
Moscow. In fact, for a brief time, Bank of New York Inter-Maritime was used 
in 1994 by the Bank of New York to conduct business in Russia. 

The world of international banking is often built on personal relationships. 
In that world, an ability to deal easily across borders and within business, 
political and financial circles is highly valuable to big banks. To gain 
access to certain foreign markets, the Bank of New York has relied on people 
like Rappaport. 

Born in Haifa, now Israel, Rappaport has used his base in Geneva to pursue 
investments and business in a wide range of places, including Oman, Liberia, 
Nigeria, Haiti, Thailand, Indonesia, Belgium and the United States. Rappaport 
opened Inter-Maritime in Geneva in 1966. 

By the 1980's, he was one of the Bank of New York's largest individual 
shareholders, controlling millions of dollars in stock amounting to a nearly 
8 percent stake in the company. 

Although virtually all of that stock has been sold, back in the 80's, 
Rappaport's hefty stake gave him entre to the bank's senior management, 
including the chief executive at that time, Carter Bacot. Bacot, whom the 
Bank of New York declined to make available for comment, is said by a former 
Bank of New York senior executive to have approved the bank's decision to buy 
a large stake in Rappaport's bank known then as Inter Maritime. 

By 1992, the Bank of New York reportedly owned about 28 percent of what 
became known as Bank of New York-Inter Maritime. 

In the Federal money-laundering investigation of the bank that surfaced last 
week, one of the accounts authorities are looking at is Benex, which moved 
funds through the Bank of New York as well as the Bank of New York-Inter 

The sole director of Benex Worldwide, a British affiliate, according to 
corporate records in London, is Peter Berlin. He is the Russian-born husband 
of one of the senior officers at the Bank of New York, Lucy Edwards, who was 
suspended last week by the bank. Ms. Edwards, 41, oversaw Russian accounts in 
the Bank of New York's London office. 

Berlin is believed by American investigators to have had authority over the 
Benex account at the Bank of New York. 

An initial round of Federal subpoenas issued to the Bank of New York produced 
3,500 pages of transactions for one account in Benex's name, investigators 

Ms. Edwards reported to Natasha Gurfinkel Kagalovsky, who is based in New 
York and supervised all of the bank's Eastern European business. 

Ms. Kagalovsky, 44, was also suspended because of the money-laundering 
investigation, and her office, like Ms. Edwards's, was searched and sealed by 
law-enforcement officials last week. The Bank of New York has repeatedly 
declined to make either of the women, who have not been accused of any 
wrongdoing, available for comment. 

Ms. Kagalovsky's husband, Konstantin Kagalovsky, is a former senior executive 
at Bank Menatep, one of Russia's largest banks. And Menatep, according to 
Western law-enforcement officials, has also had dealings with Rappaport. 

Menatep, now virtually insolvent, is part of an industrial empire overseen by 
Mikhail Khodorkovsky, one of Russia's prominent financiers, or so-called 
"oligarchs." Bank of New York had an active relationship with Menatep and 
helped the bank list its stock for trading in the United States. 

Federal investigators are trying to determine whether some of the money that 
may have been laundered through the Bank of New York came from Menatep. 
Menatep, and related companies in Russia, are suspected by Western investors 
and Russian regulatory authorities of having looted money from the country, 
assertions that Khodorkovsky and his representatives have firmly denied. 

In 1994, Khodorkovsky briefly served as a director of the European Union 
Bank, an Internet bank based in Antigua. Khodorkovsky has said that he served 
as a director of the on-line bank for only one week and had no further 
involvement with it. The bank later collapsed amid accusations from various 
regulators that it was a scam. 


The Guardian (UK)
22 August 1999
[for personal use only]
Russian mafia target the City 
Fury in Britain as US leak blows investigation into money-laundering link 
with world's most wanted man
By Tony Thompson and Paul Farrelly

Three days after the murders the German film crew turned up at the fortified 
Budapest home of Semion Mogilevich, the man they call 'the most dangerous 
mobster in the world', hoping for an interview.

The bodies of four East European prostitutes, a brothel owner and his wife 
had been found in a stuccoed villa on the edge of Frankfurt's business 
district. The women were naked, hands tied behind their backs, and were 
forced to lie face down before being strangled. The brothel owner, who 
disturbed the murderer, was garrotted.

Russian police believe Mogilevich is a senior figure in the Solntsevo, 
Russia's biggest organised crime gang, run by Sergei Mikhailov. Mogilevich 
runs prostitution on a massive scale through out Eastern and Western Europe, 
was said to have arranged the murders to deter rival operators from moving in 
on his patch. 

The interview lasted approximately eight seconds - a group of large men in 
suits with machine-guns ordered the crew to get out of town or be killed on 
the spot.

Last week Mogilevich, who is also said to be involved in the traffic of 
nuclear materials, drugs, precious gems and stolen art as well as contract 
killings, was linked to an investigation by officers from the National Crime 
Squad at the London office of the Bank of New York after it emerged that 
between $4.2 billion and $10 billion of dirty money had been laundered 
through a single account.

Two members of the bank's staff - one in London, the other in New York - have 
been suspended pending completion of the investigation.

Author Jeffrey Robinson - whose latest book, The Merger, was published by 
Simon and Schuster last week - says that organised criminals such as 
Mogilevich are enjoying massive success using Harvard Business School 

'Mogilevich typifies the new global criminal,' says Robinson. 'These men 
don't rob banks, they buy them. They take full advantage of globalisation, 
ill-equipped law enforcement and lax money-laundering laws - especially in 
Britain - using the City of London as their onshore gateway to the offshore 

'This case is the tip of the iceberg. The City is an absolute cesspool and it 
will remain a cesspool because the people in charge don't care. Mogilevich is 
not the only one, the Bank of New York is not the only place. London is the 
best place to launder money in the world. Since the money-laundering 
regulations were introduced in this country four years ago, there have been 
thousands of reports but only one successful prosecution.'

Intelligence sources in Moscow believe that the British and US investigations 
have uncovered a major conduit of dirty money out of Russia that involved the 
connivance of Russian organised crime overseas and senior figures in the 

Konstantin Grigoryevich Kagalovsky, the husband of Natasha Kagalovsky, the 
senior Bank of New York executive suspended in the US, headed Russia's debt 
negotiations with the West.

A measure of Kagalovsky's importance in the power nexus is that he was 
expected to head next year's presidential campaign by former Russian Prime 
Minister Victor Chernomyrdin.

His mentor, Anatoly Chubais, who later became Boris Yeltsin's chief of staff 
in the Kremlin, is now head of the pro-Yeltsin political bloc which, along 
with Chernomyrdin's party, is expected to back new Prime Minister Vladimir 
Putin's run for the presidency next year.

Mogilevich came to the attention of Britain's National Criminal Intelligence 
Service through the money-laundering activities of Arbat International and an 
associated Channel Islands company, Arigon. The investigation, code-named 
Operation Sword, led to the arrest of three people, including two City 
solicitors, in 1995.

Soon after Mogilevich made a call to the London offices of the National 
Criminal Intelligence Service. The officer he wanted to speak to was not 
there but he left a message asking why he was being chased by the British 
police when he was a legitimate businessman. The call was not returned but 
Mogilevich was banned from entering the UK.

This has done little to stop his wealth and influence growing rapidly. 
According to Robinson, transnational crime of this kind no longer requires 
criminals to be in any particular place. 'Mogilevich can sit in Budapest and 
play the Toronto stock exchange to make himself $635 million or launder 
$4.3bn through the Bank of New York in London.'

In fact, Mogilevich has rarely stepped outside his front door since the day 
in May 1995 when he travelled to Prague to attend a birthday party at the 
Uhaluba Club.

Just before he arrived, he was tipped off that some time during the evening 
he would be murdered. He immediately turned around, went home and hired 
additional security guards. He now conducts almost all his business by phone, 
e-mail and fax.

During 1996, according to Russian intelligence sources, the NCIS also went to 
Moscow to identify the extent of Mogilevich's activities and connections in 
the Russian underworld. Subsequent co-operation with the US authorities led 
to FBI raids a year ago on a US-based firm, YBM Magnex International, which 
bought Arigon and was a major conduit for money-laundering. YBM, a magnets 
company with activities in the UK, has since been closed down.

Operation Sword led directly to the British investigation into Mogilevich's 
connections with the London branch of the Bank of New York. An undercover 
investigation, said to involve agents from MI6 and the FBI, was continuing 
until news of the case broke in the New York Times last week.

The National Crime Squad is furious at the leak - suspected to be from a 
high-level US source - which prompted a hasty raid on the central London 
apartment of Lucy Edwards, the Russian-born London employee of Bank of New 
York also suspended last week, and her Russian husband Peter Berlin.

The British authorities, which have been co-operating with the FBI and the US 
Attorney's office, are particularly incensed at the leaking to the New York 
Times of a confidential report on the capabilities of the National Crime 
Squad, which had a limited circulation.

Berlin and Edwards were present during the raid last Wednesday evening as 
documents, a computer hard drive and disks were taken away in large plastic 
bags. No arrests were made and the whereabouts of the two are now unknown. 
They were not answering their phone this weekend.

British inquiries have looked at the use of accounts at Bank of New York by 
Benex Worldwide, a UK company of which Berlin is sole director and which 
investigators have linked to Mogilevich's YBM.

Benex is understood to have made applications for US visas for associates of 
Mogilevich, which were turned down. Among other companies, the police are 
also examining another UK firm, International Investment Finance Company, of 
which Berlin is a director along with three Russians.

One senior source at the National Crime Squad expressed pessimism about 
successful prosecutions. He told The Observer: 'The briefing to the New York 
Times has jeopardised operations that are still ongoing on both sides of the 
Atlantic. Now all the people we have been looking at will simply vanish.' 


The Times (UK)
August 21 1999
[for personal use only]
Russian bear falls to beer imperialism

VODKA is Russia, they say, and for centuries the elixir has inspired, 
sustained and ruined Russians. But in the past two or three years the 
unthinkable has happened: Russians in their thousands have deserted vodka and 
turned to softer, lighter drinks, especially beer. What Lenin yearned for and 
Gorbachev humiliatingly failed to carry through, the hurly-burly of the free 
market is finally achieving. 

Younger Russians, especially the generation growing up after communism's 
collapse, have neither the time nor taste for a drink that more than any 
other factor is associated with Russia's historic failings: drunkenness, 
violence, sloppiness and the ruin of businesses, hopes and families. And for 
the first time they have an alternative: good, cheap and plentiful lager 
beer, brewed in Russia and now distributed to even remote villages. Beer 
consumption has increased by 500 million litres every year since the break-up 
of the Soviet Union. By last year Russians were drinking 3.2 billion litres a 
year - 27 per cent more than in 1997. This still works out at only 19 litres 
a head, compared with 83 litres in America and 129 in Germany. But the figure 
is rising quickly and was unexpectedly boosted by the crash of the rouble. 

Last August Russians were drinking huge quantities of fashionable imported 
beer. Heineken, Bitburg, Carls-berg and Kronenbourg were among the big 
European names on the umbrellas shading the new beer stands in Moscow's 
parks. Guinness was selling in the "Irish" pubs. 

However, devaluation suddenly made these foreign beers expensive. 
Enterprising local breweries saw their chance. St Petersburg has swiftly 
emerged as Russia's brewing centre. Baltika Brewery is now the largest of its 
kind in eastern Europe and its beer is becoming a cult among Russians, proud 
at last to have a beer that can compete with Western brands. Baltika now has 
15 per cent of the market. 

As sales soar, beer companies are rapidly being consolidated. Together with 
Baltika, Efes, a Turkish-owned brewery in Moscow, and Ochakova, a 
Russian-owned company, produce four fifths of the annual output. Beer's 
trendy image is promoted by festivals, Western-style pubs and pavement cafés, 
and advertising association with the West. A raucous Great Russian Beer 
Festival filled the Olympic stadium in Moscow for a week last month. 

The post-communist switch to drinks with a lower alcohol content is exactly 
what communist bureaucrats have been proposing ever since the Revolution. 
Vodka was officially banned between 1917 and 1936 in an effort to stamp out 
the drunkenness of tsarist times. Lenin railed against vodka but could not 
fight a tradition that began in the 15th century and had a stranglehold on 
the peasantry in the last century. It was reintroduced only in the Second 
World War to fortify the troops. 

In the Brezhnev era, officials had grand plans to invite Western breweries to 
set up factories in the Soviet Union. Nothing came of it. Gorbachev's curb on 
vodka sales brought him lasting and widespread unpopularity. The State earned 
so much money from vodka taxes that all proposals to cut production were 
ineffective. They only stimulated the clandestine rural production of 
moonshine - samogon - which regularly kills and disables huge numbers each 

Russian beers in the past were never a serious substitute for vodka - 
unpasteurised, uninspiring and largely unavailable. Beer was swilled down in 
rough beer halls or on street corners. Most people made do with kvas, an old, 
bread-based fermentation, sold from tankers outdoors. 

Politics and the market have helped the beer boom by ruining the competition. 
Russia has lost most of the southern wine-producing former Soviet republics 
and virtually all wines now arriving in Moscow from Georgia and Moldova are 
fake concoctions marketed by gangsters. Vodka has also suffered from 
widespread falsification, with crude alcohol mixes passed off as famous 

As ever, patriotism and drinking go together in this country. Beer, Russians 
now insist, is really their oldest drink - indeed the word for it, pivo, 
comes from the Russian word for "to drink". 


From: "Paul Backer, Esq." <>
Subject: Searching for a sensible post-Clinton foreign policy in Eastern
Date: Sat, 21 Aug 1999 

Searching for a sensible post-Clinton foreign policy in Eastern Europe.
August 20, 1999
Paul Backer (

The author is a Russian speaking, American attorney with a practice
involving Russia and Eastern Europe, including service on several Rule of
Law projects.

(private use only, republication by permission only)

The anniversary of Russia’s economic collapse brings long needed public
attention to the debate on the impact of the Clinton administration’s multi
billion dollar foreign aid and lending policies in Eastern Europe. Critics
see the Clinton administration’s aid and development foreign lending,
transfer and credit policy as wasteful, ineffective and at times, harmful.
They point to rampant corruption, theft of funds and mission leak besetting
these programs. Russia, the showcase of Clintonite policy and receipient of
billions of dollars of transferred funds is seen as a prominent example
where existing policy failed to effectively promote economic development,
political stability or Rule of Law.

In fact the Russia’s situation is desperate and appears to be getting worse.
Political stability is as distant as ever, Russia’s fifth prime minister in
seventeen months is widely expected to be replaced within the next six
months. By all objective measures Russian economy is in dire straits.
Foreign investment is falling and at the current level of 3 billion dollars
a year, less than a sixth of investment into Hungary. Per capita income in
hard currency is falling toward historic post-World War II lows and
continues to decline. Russia’s society is approaching economic feudalism,
with many citizens effectively tied to their workplace due to the extremely
low salaries paid or frequently not paid or paid in scrip, goods or food.
Capital flight is exploding, estimated at 200 to 500 billion dollars during
the post Communist period. Annual capital flight from Russia is estimated
to exceed Russia’s rather modest federal budget of 20 billion dollars.
Russia’s democratically elected government, the primary beneficiary of
Clinton’s policies and friendship enjoy public support in the single digits.

Clintonite foreign policy is seen as poorly targeted, lacking objective
targets and performance criteria, responding more to the needs on the
Beltway than on the main streets of Eastern Europe. In effect, the dumping
of billions of dollars in U.S. and international financial organization
funds into Russia absent any effective safeguards played an important role
in criminalizing Russian society and preventing the development of effective
finance, securities and corporate law enforcement structures needed to
prevent capital flight. Recent news coverage stunningly illustrates that
Clinton policy problems are systemic, going well beyond Russia. This week,
the NYT reported that $1 billion in public assistance funds were missing,
misapporpriated or simply stolen in Bosnia during the effort to rebuild
after the war. While it is striking as an example of Serbian, Croatian and
Bosnian leadership effectively working together, it is hardly what the State
Department could have intended. The response of the international aid
community, hushing up incidents not to “discourage giving” is equally

Attempts to promote a rational analysis of the current policies and improve
their performance are greatly complicated by the response they receive. The
response from the authors of the existing policies borders on either
hysteria or the unintentionally, hysterical. President Clinton referring to
the Republican Congress’ efforts to cut aid spending stated at an August
16th meeting of the Veterans of Foreign Wars that, “We are cutting the very
programs designed to keep our soldiers out of war in the first place.” And
that “The costliest peace is far cheaper than the cheapest war.” Apparently
the key goal of Clintonite foreign policy is the prevention of war.

Examining the Clinton administration’s historical record puts lie to these
odd statements. America used sizable military force during President
Clinton’s term including Serbia, Bosnia, Iraq, Somalia, etc. It is
difficult to identify what foreign aid program could have kept Saddam
Hussein from invading Kuwait or continuing to provoke U.S. bombing or the
centuries of ethnic tensions from exploding in the former Yugoslavia. In
these cases, it appears that the Clinton administration repeatedly opted for
the war. Alternatively, it appears impossible to identify even one instance
where Clinton’s foreign policy prevented a war. The primary appeal of the
“aid prevents wars” argument is that by the very nature of being prevented,
such wars are not quantifiable. As an argument for the efficacy of a multi
billion dollar, almost decade long foreign policy it is at best double speak
and at worst, complete nonsense.

Proponents of current policy argue that by its very nature foreign aid,
whether loans or credits or technical assistance is humanitarian aid to the
most needy and therefore not quantifiable. They argue that the goals
pursued are worthy and that tremendous effort and expense are expended in
their pursuit and that fault is not so much in the “how” and “what” of
foreign aid, but rather in the “not enough”. What makes these arguments
striking is that they very neatly mirror the welfare reform debate in the
U.S. in the past few years.

The arguments were the same, that we must show our humanity and help those
least able to help themselves. The truth of this assertion is self evident,
we as a wealthy nation with a moral mission must help the less fortunate,
particularly as it will create markets for our products and services.
However, the other arguments are unconvincing. The argument against
introducing objective criteria as being dehumanizing, impossible, cruel,
arbitrary and doomed to failure. The roughly 50% reduction of welfare
payrolls put lie to this argument in public spending.

The “trump” argument that we could not seek a change, that those receiving
our aid were so dependent, so unable to fend for themselves that any change
in policy would effectively throw people unable to care for themselves to
the wolves. That argument severely underestimated the decency, humanity,
desire and ability to work of those who require our help and guidance. Many
American states took a long hard look at their policies on welfare, medical
and other assistance programs and found them wasteful, ineffective and
inhumane. The states sought a responsible way to change failing policies
and found that way. Welfare rolls are down dramatically, jobs are up and
arguably with them, self respect and human dignity are up too.

The way found is targeted, self sustaining programs able to show local
demand, rather than vague policy goals mandated from outside and reliant on
outside experts largely unfamiliar with the environment. These policies are
proving a significant success. At the same time, another revolution is
sweeping America, roughly known as venture capital philanthropy. It is an
approach to giving by entrepreneurs who hold aid projects responsible for
achieving tangible ogals and quantifiable improvements. These approaches
reject the approach that aid, whether as loans, grants or other transfers
can not be quantified or measured or administered in accordance with the
private sector’s performance standards. These approaches have had great

Yet, in the foreign policy arena, we persist in policies rejecting these
successful approaches. Bllions of IMF, World Bank and national governments’
transfers to Russia not only failed to achieve their policy goals they are
quite simply, missing. The Clintonite foreign policy succeeded where
decades of Soviet propaganda failed, undermining the very legitimacy of
democracy and market economics in the eyes of many Russians. While states
such as Hungary, Czech, Poland and others’ largely “weaned” off the West’s
foreign aid transfers are on the road to economic recovery, Russia
flounders. The states of Central and Eastern Europe developed enforced
corporate, securities and finance laws attracting substantial foreign
investment and discouraging capital flight. Russia’s capital flight exceeds
its annual federal budget and its society’s criminalization is worsened by
the impact of billions of dollars of unaccountable for funds transferred in
by the West. The U.S. and other governments continue technical aid projects
(outside the purely humanitarian area) that are not self sustainable, can
never be self sustainable and don’t appear to make any quantifiable process.

Considering, the huge amounts and tremendous responsibility involved, it’s
about time that we decided three things. First, what has worked and what
hasn’t and undergo the painful, but vitally important process of disclosing
past failures and misdeeds. Second, what accountability, management and
performance standards should be demanded from future projects, such as their
ability to illustrate local demand. Finally, we need to apply management,
performance and accountability standards not only to the administration of
future projects, but to its recipients and originators even at high
governmental level. The dialogue to identify, lobby for and implement
responsible projects and policies must continue beyond the “anniversary”


IMF Head Refutes Le Monde Charge of Laxity 

Paris Le Monde
19 August 1999
[translation for personal use only]
Article by Michel Camdessus, director general of the International 
Monetary Fund: "The IMF, Russia, and Le Monde" 

Allow me to express my indignation at the untruths, 
allegations, and insinuations published in the Le Monde articles and 
editorials of 6 August and dated 8-9 August concerning the contents of 
the Price Waterhouse Cooper's (PWC) report of audit of the operations of 
the Central Bank of Russia and its subsidiary Fimaco. 

In a first page reportage titled "How Russia Misappropriated IMF Funds" 
it is charged that this subsidiary "speculated in this way to the profit 
of the oligarchs in power." An editorial adds that "in the style of 
garden-variety swindlers, Russia misappropriates the international 
community's money to facilitate the enrichment of a few oligarchs." Worse 
yet, we learned there that this misappropriation of funds is taking 
place, if not with the agreement of, at least "with full knowledge of the 
facts on the part of the bigs of this world: the top officials of the 
IMF, beginning with its general director, Michel Camdessus." 

Le Monde's readers will be surprised to learn that the cited report of 
audit, which the IMF had requested and whose publication it had demanded, 
says nothing of the kind. The report does not state a finding of 
misappropriation of funds and it does not call into question "the conduct 
of the IMF in the face of the mass of shady operations." This document 
was certainly not posted on the IMF's Internet site only after the 
publication of Le Monde's 6 August editorial and article. The decision to 
publish it had been posted more than a week before. Contrary to what you 
imply in your article of 8 August, it therefore does not stem from your 
"revelations." In fact, on 16 June, and even before knowing its content, 
I personally requested the Russian authorities to publish that report. 

I also note that your presentation of the data that was known to the 
IMF and of the action it took is likely to mislead your readers. We knew 
for a fact that a fraction of the Central Bank of Russia's reserves was 
deposited in foreign branches, which is not an illegal practice. On the 
other hand, prior to this year, we were not aware of Fimaco's activities, 
because the 1993 and 1994 audit reports had not been transmitted to us by 
the Central Bank of Russia. 

When we were informed of the possible extent of Fimaco's activities, we 
indicated to the Russian authorities that the IMF would not resume its 
loans until it received a report on Fimaco and an agreement were reached 
on the corrective measures that might be needed. The version of the PWC 
report transmitted to the IMF on 9 July was delivered to our Board of 
Directors on 20 July, accompanied by attached documents, for purposes of 
the Board's review, on 28 July, of the new loan application submitted by 
the Russian authorities. There as well, contrary to what you suggest, it 
was never a matter of putting off an IMF reaction to, or of delaying a 
public comment on, Fimaco's activities. 

I add that the objections raised by the IMF to Fimaco's operations go 
well beyond the deceptive presentation of the state of Russia's 
international reserves in the middle of 1996. They also include several 
other transactions by its intermediary that had the effect of 
misrepresenting the situation of Russia's reserves as well as its 
monetary and exchange policies. The loans being made to the Russian 
commercial banks, and for investments in the Russian Treasury paper 
market (GKO), are cases in point. 

Contrary, once again, to what you assert in order, it would seem, to support 
the idea that other operations of this type could well have taken place 
again since then, the audit of Fimaco's activities was not limited to 
those of a brief period in 1996. The PWC report covers the entire period 
from the creation of Fimaco to the beginning of 1999, the date of the 
start of the audit. 

The IMF moreover, in drawing its conclusions, did not depend solely on 
this report and on the meetings it held with PWC's consultants. Officials 
of our departments met with members of the staff of Russia's Attorney 
General Skuratov, and with representatives of the Duma's General 
Accounting Office, to determine whether the audit should or should not be 
extended to other areas. 

The articles to which I refer contain several other errors of fact, to 
say nothing of the ill-founded allegations against me. I cannot enumerate 
them all. Two of them sufficiently distort any rational interpretation of 
the events that took place in Russia, and of the IMF's cooperation in the 
audit of Fimaco, as to warrant their correction. 

First of all, it is totally absurd to state that Fimaco's holding of a 
large volume of Russian Treasury paper greatly delayed the 1998 
devaluation of the ruble. The fact is that Fimaco held none of those 
assets after 1996. 

And second, you assert that, according to the PWC report, PWC's 
consultants had no knowledge of agreements with the IMF stipulating the 
terms and conditions of investment of the reserves. You thus imply that 
information may have been withheld during the audit and that our 
institution failed to exercise due diligence in the performance of its 
responsibilities in the particular case of Russia. Such agreements have 
never existed. 

When the IMF provides aid to the balance of payments of a member country, 
it does so without imposing a specific allocation of these funds. The 
funds loaned by the IMF in this respect may be allocated to the financing 
of that country's budget or to the bolstering of its international 
reserves, depending on the program adopted by that country's authorities. 

In this particular case, the Russian program called for allocating a 
portion of the funds to the financing of its budget and another portion 
to the boosting of its international reserves. It set forth also a number 
of points of agreement concerning budgetary policy, but--again in 
accordance with established practice--without imposing criteria relative 
to investment of the country's reserves, since this would be in 
contradiction with the need to preserve the liquidity of its assets. 

This flexibility with respect to the allocation of the funds we lend, 
however, does not at all signify that we are indifferent to the borrowing 
country's allocation of its budgetary resources. An essential part of the 
negotiation of the program that has just been approved by the Board of 
Directors consists, for the IMF, of persuading the Russian authorities to 
increase their budgetary resources--particularly by increasing the 
taxation on the big monopolies such as Gazprom--so as to be able to 
adjust wages, social welfare benefits, and pensions, the face value of 
which the government had decided to upgrade in view of the projected 
inflation rate of 50 percent for the year 1999. 

This point bears out the extent of the erroneousness of the information 
you headlined on 2 July 1999, according to which "Russia is cutting back 
on family benefits in order to satisfy the IMF." 

This brings me to your judgment that the terms and conditions of our 
loans to Russia are "by no means restrictive," lending to Russia having 
"become second nature for the IMF." Here as well, you could perhaps have 
wondered how, if this is the case, our Board of 24 directors, 
representing 182 countries, can have approved the loans by unanimous 

The fact is that the IMF is only pursuing a policy in Russia that 
consists of seeking to facilitate pursuit of--obviously too slow--a 
reforms policy. I think, nevertheless, that were you to summarize for 
your readers the content of the reforms on which the granting of loans 
has been conditioned, that have been published, and many of which are now 
in place, they would share the opinion of the Board of Directors that 
such a strategy--by no means optimal, admittedly--is worth the try, and 
is preferable to the bankruptcy of Russia, and to the economic isolation 
of that country, with all the consequences this could entail. 


Communists Seek to Win Orthodox Believers Over for Polls.

SUZDAL, Vladimir region, August 21 (Itar-Tass) - The People's Patriotic Union 
of Russia will encourage Orthodox believers to side with its members in the 
upcoming elections to the State Duma in December 1999, Communist Party leader 
Gennady Zyuganov said. 

Zyuganov told Itar-Tass on Saturday that the People's Patriotic Union of 
Russia (NPSR) believes that "Orthodoxy has to play a critical role in 
Russia's revival" and "believers and politicians who think nationally should 

"Orthodox laymen cannot participate in elections in bloc. They are not strong 
enough for that. This is why the NPSR will support them in every way," he 

Zyuganov seems not to be discouraged by the deep gap in the views of Orthodox 
believers and the followers of Vladimir Lenin, the founder of the first 
Soviet state. 

He believes that unlike their predecessors, modern Communists have changed 
their attitude towards the Church. "I have managed to convince my party 
colleagues to change their opinion," he said. 


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