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Johnson's Russia List
27 August 1999
[Note from David Johnson:
1. Itar-Tass: Russian Lawyers to Hold First National Congress.
2. Moscow Times: Brian Whitmore, U.S. Press Names 5 In Bank Scandal.
3. The Moscow Tribune: John Helmer, WHEN THE SAINTS COME MARCHING IN.
4. AFP: Russian prosecutor accuses Yeltsin's office of blocking bribes
5. The Times (UK): Russians lay fresh claim against bank.\
6. The Economist editorial: Fuelling Russia’s economy.
7. Ray Smith: re Merry on Russian Succession Scenarios.
8. Reuters: Yeltsin hails 50 years of Russia A-bomb.
9. Ira Straus: Re: Arguments for break-up (JRL 3460).
10. Harvard's Russian Election Watch.
11. Financial Times: Andrew Jack, The tricks Russians use to funnel cash
Russian Lawyers to Hold First National Congress.
MOSCOW, August 26 (Itar-Tass) - Russian lawyers will hold their first
national congress in October to discuss the general self-government concept
of the Bar of the Russian Federation and its prospects in the near future,
Gasan Mirzoyev, president of the Guild of Russian Lawyers, told journalists
Time is ripe for Russian lawyer communities to consolidate their efforts and
gather for a wide and representative all-Russian forum to outline uniform
principles of work, Mirzoyev said at a meeting of representatives of lawyers'
The congress, scheduled to open on October 13, is expected to attract nearly
3000 lawyers from all parts of Russia, Mirzoyev said.
August 27, 1999
U.S. Press Names 5 In Bank Scandal
By Brian Whitmore
The scandal just keeps growing and growing.
In what is quickly turning into a public-relations nightmare for President
Boris Yeltsin, a U.S. newspaper added another report of alleged involvement
by Russian government figures in the laundering of billions of dollars
through U.S. banks f this time naming names of current and former officials.
USA Today reported Thursday that Russian organized crime figures laundered at
least $15 billion though four accounts at the Bank of New York and one at New
York-based Republic National Bank. Law enforcement officials are probing five
current or former officials to determine their roles in laundering the money,
the report said.
Citing unidentified sources in the British National Criminal Intelligence
Service and the Russian Prosecutor General's Office, the paper named the
five: Yeltsin's daughter Tatyana Dyachenko, former deputy prime ministers
Anatoly Chubais and Oleg Soskovets, former Finance Minister Alexander
Livshits and Interros president Vladimir Potanin.
USA Today did not say what role any of the five played in laundering the
money. It reported that law enforcement officials said the money might have
included money loaned to Russia by the International Monetary Fund.
Money laundering is a legal catch phrase for moving ill-gotten gains through
a series of bank accounts to make them look like legitimate business
Attempts to independently verify the USA Today report met with denials from
U.S. and British law enforcement officials. In a telephone interview from
London, Mark Steels, a spokesman for National Criminal Intelligence Service,
denied that anybody from that organization had provided any information on
the matter to either USA Today or any other news organization.
"Nobody from NCIS ever said any such things to any individual or any news
organization," Steels said. "Moreover, nobody at this organization has spoken
to anybody at USA Today. We have written a formal complaint to USA Today and
are asking for a correction."
Steels declined to comment on the details of the USA Today report, other than
to say that the NCIS was "exceptionally unhappy about it." Joseph Valiquette,
a spokesman for the FBI's New York field office, wouldn't comment on the USA
Today report, saying: "The FBI has not even acknowledged that an
Russia's acting Prosecutor General Vladimir Ustinov on Thursday called for
the Federal Security Service to "check the facts cited in the Russian and
foreign press reports on the scandal around the Bank of New York."
The USA Today report came hot on the heels of a story in the Italian
newspaper Corriera della Sera on Wednesday claiming that the Swiss company
Mabetex f which won lucrative contracts from the Kremlin to renovate
government buildings f had provided Yeltsin and his two daughters with $1
million in so-called "pocket money." And that bombshell came right after a
Wall Street Journal report Tuesday, claiming that $200 million from IMF loans
to Russia may have been laundered through the Bank of New York.
The Kremlin press service released a statement through Interfax on Thursday
saying that "Yeltsin, his wife and children have never opened accounts in
foreign banks." Likewise, Chubais, in a statement released to the media
Thursday, said, "Never have I had bank accounts abroad. Not during my years
in government or the presidential administration and not now."
Allegations of corruption and money laundering among Russian government
officials are potentially damaging for Yeltsin and Russia because they could
undermine confidence in Russia among foreign governments, lending
institutions and aid agencies f on which the cash-strapped government depends
for loans and other assistance.
The media blitz has gained the attention of the U.S. House of Representatives
Banking Committee, which has scheduled congressional hearings on the matter
"We are still in the information gathering stage but the committee is
interested in how complicit the Bank of New York was in this and whether or
not IMF funds were involved," said Andrew Parmentier, a spokesman for
Congressman Jim Leach, the committee's chairman.
The money laundering scandal broke last week when the New York Times ran a
story claiming that Russian organized crime groups had spirited as much as
$10 billion through accounts in the Bank of New York. The report claimed that
the laundered funds were used for activities ranging from contract murders to
the narcotics business.
Banking committee chairman Leach used strong language in connection with the
scandal, saying: "With regard to the Bank of New York, the question is
whether they were unwittingly duped or were willing facilitators in what may
be the greatest example of kleptocratic governance in modern history."
The New York Times reported that some $4.2 billion passed through the bank in
more than 10,000 transactions between October 1998 and March 1999 alone. The
bank has suspended two employees who handled the accounts, Natasha Gurfinkel
Kagalovsky of New York and Lucy Edwards of London, both of whom are married
to Russian businessmen.
Gurfinkel Kagalovsky is the wife of Konstantin Kagalovsky, who from 1992
until 1995 was an adviser to the Russian government and its representative to
the IMF. Kagalovsky also worked at the now defunct Bank-Menatep and is
currently vice president of the giant oil company Yukos. Edwards is married
to Peter Berlin, described as the owner of Benex, a company which had
accounts at the bank. None of the four has been charged with a crime.
The New York Times reports, as did USA Today, linked the accounts to Semyon
Mogilevich, whom U.S. law-enforcement officials have tied to a wide range of
activities ranging from arms trafficking to extortion to prostitution.
Date: Thu, 26 Aug 1999
From: firstname.lastname@example.org (John Helmer)
The Moscow Tribune, August 26, 1999
WHEN THE SAINTS COME MARCHING IN
>From John Helmer in Moscow
If you never had much of a memory for names, then what difference
can you make out between Konstantin Kagalovsky, Kenneth Dart, Jonathan Hay,
and Anatoly Bykov?
It won't help that, not too long ago, the first trio were widely regarded
as economic reformers, working their fingers to the bone to
assure that Russia implemented the criteria of the International Monetary
Fund (IMF) for liberalizing its economy, including the American model of
shareholding companies, with transparency of dealings and accounts, and
legal safeguards for shareholders.
Nor will it be of use to recall that, back then, they were the saints of
Russia's economic transition; whereas Bykov, the boxer turned boss of
Krasnoyarsk Aluminum Works, was reported to be the devil, accused of doing
everything the reformers were sworn to stop -- rigging share emissions,
assassinating shareholders and managers, and skimming hundreds of millions
of dollars of profits from foreign metal trade into offshore hideaways.
All of a sudden today, Kagalovsky, no longer Russia's IMF representative,
is suspected of involving himself in money-laundering through the Bank of
New York, through clients and transactions supervised by his wife.
He hasn't responded, except to have a spokesman claim it's unfair to link
him to money-laundering because of his marriage.
Those who know the couple say that, while it may be unlikely for so much
money to be manipulated by so few in such a short time -- $23 million
through one account every day for six months, including Saturdays and
Sundays -- noone believes Mrs. Kagalovsky would not have worked closely with
And all of a sudden, in a claim just filed in a New Jersey court,
Dart and Hay stand accused of investing in an illegal trade scheme
that over-priced raw materials supplied to Avisma, Russia's leading producer
of titanium, and then under-priced the titanium that was exported
The 73% overcharge produced $5 million in profit, according to the court
documents. The under-pricing produced $45 million. Part of this money was
spent on purchasing shares of Avisma, although not quite enough for Dart
and Hay -- the latter elected by Dart votes to be a director of Avisma
-- to exercise the majority control they thought they had acquired in a
complicated transaction last year.
That transaction was arranged by Bank Austria, through a Moscow investment
company called Creditanstalt-Grant. The bank traded Avisma shares from
Menatep Bank, which first privatized Avisma in 1995, to Dart, Hay and others,
on the explicit promise they could divert profits from the trade scheme to
the shareholders' bank accounts. When some of the money failed to arrive on
time, there was a lawsuit in the Isle of Man and Ireland. That was quietly
settled out of court five months ago. But Avisma never got its share of the
Dart's company says it did nothing wrong, and shut the scheme down when
it learned about it. Selling high, buying low, and selling even higher may not
seem wrong in New Jersey. But the court documents suggest that the skimming
went on for at least a year before the scheme was halted -- and maybe only
then because the Avisma management was no longer agreeable.
Hay, according to Dart representatives, "did not have any professional
arrangement" with Dart. Exactly what the arrangement was when Dart voted
Hay to represent their interests on the Avisma board, if not a professional
one, isn't clear. Hay won't respond to questions about this. But through his
spokesman, he did call me a "stooge" for reporting court claims that this
was the role he performed for Dart.
Nobody would dare call Bykov a stooge, but the charges reported to have
been listed in a warrant for his arrest last week, are
similar to the ones Kagalovsky, Dart, and Hay are now facing. These
include illegal diversion of the profits of Russian commodities trade,
and money-laundering to conceal what the rewards were for, and where they were
Noone has ever called Bykov a reformer, nor Kagalovsky, Dart and Hay
gangsters. The labels simply helped newspaper readers who had trouble
remembering the names, identify who were the saints; and also who to turn to
for investment tips.
It won't be news to anyone to hear that Russia's commodities trade
has been a multi-billion dollar racket. Nor will the latest police and
courtroom moves end the fierce struggle for control of these trade
revenues right now.
But now that you know what you suspected all along, only you couldn't
remember the names, what is there left to say?
The answer is that in the grand larceny that has been the Russian
economy since 1992, the foreigners were no better than the Russians. Reform
meant stealing on a grander scale than even the Krasnoyarsk gangs
could imagine. Only when that is understood, can the clean-up can commence.
Russian prosecutor accuses Yeltsin's office of blocking bribes probe
ROME, Aug 26 (AFP) - Russia's chief prosecutor Yuri Skuratov, interviewed by
an Italian newspaper, accused President Boris Yeltsin's office of blocking
his investigation into corruption at the highest levels of the country.
Skuratov's allegations, in Thursday's edition of Italian daily Corriere della
Sera, came the day after the paper reported that Swiss magistrates had seized
documents linking the president and his family to suspected kickbacks in
return for construction contracts.
Skuratov implicity confirmed that he was investigating bribery allegations
against Yeltsin and his daughters although he said he could not comment on
"That is part of an ongoing investigation and I cannot talk about it because
it is under seal," he told the paper.
The Italian paper reported on Wednesday that the Swiss federal prosecutor
Carla del Ponte had led an operation to seize documents and bank statements
containing evidence of suspected bribes paid to Yeltsin and his daughters
Elena Okulova, 42, and Tatyana Dyacenko, 39, by Kosovar Albanian businessman
Bahgjet Pacolli, who is being investigated for corruption.
Swiss-based Pacolli transferred one million dollars (950,000 euros) into a
Budapest bank account for the president's use, arranged for credit cards to
be issued in the names of Yeltsin and his daughters and settled their bills
which ran into thousands of dollars, according to the paper.
The paper said Swiss investigators suspected the payments were made in
exchange for multi-million dollar contracts for Pacolli's company, Mabetex,
to refurbish the Kremlin and repair the Russian parliament, which was shelled
by tanks in 1993.
Pacolli, who was also interviewed by the paper, denied that his company paid
the credit card bills and said that one million dollars had been paid into a
Hungarian account to pay bills to a sub-contractor.
Mabetex is also accused of paying bribes to the Kremlin's economics advisor,
Pavel Borodin, who is accused of laundering the money through Swiss bank
Skuratov condemned the "attempts by the presidential administration to
obstruct my work" and added that his fiercest opponents were at the "highest
levels" of the state.
The prosecutor, who is also investigating multi-millionaire and Yeltsin ally
Boris Berezovsky, was suspended by Yeltsin from his official functions in
April after he was accused of accepting visits to prostitutes from people he
"There have been attempts to compromise me," Skuratov told Corriere della
Sera, but he said he had the backing of "Russian citizens, my fellow
magistrates, the Russian Federation and also Ukraine and Azerbaijan" in the
"The majority of (Russian) media support me, except of course those
controlled by the oligarchy," he added.
The prosecutor said he believed the investigation could continue, but that
would depend on a number of factors, incvluding a decision by the federal
council on his suspension and the legislative elections, scheduled for
Skuratov also paid tribute to the work of Del Ponte, who in September will
take over from Canadian Louise Arbour as chief prosecutor of the United
Nations war crimes tribunal.
If the allegations against the Yeltsins are proved, they would be the first
direct evidence of bribes made to the family, although the close circle
around the president has often been accused of owning overseas properties
through business proxies.
The Times (UK)
27 August 1999
[for personal use only]
Russians lay fresh claim against bank
BY JAMES BONE, DAVID LISTER AND MICHAEL BINYON
THE Bank of New York, which is at the centre of a huge international
money-laundering investigation, is likely to be hit by a damaging legal
action from Russian investors claiming that it was used in the embezzlement
of up to $1.6 billion (Ł1 billion) from a leading Russian bank.
The investigation could involve as much as $15 billion - $5 billion more than
previously suspected - and two thirds of this might represent cash siphoned
off from International Monetary Fund loans to Russia, it was claimed
Five present or former members of President Yeltsin's Government were also
under investigation, according to the latest reports.
The extraordinary set of allegations, which shocked the international banking
community a week ago and which could represent the biggest money-laundering
scandal ever uncovered, springs from more than a year of official
investigation in Britain and the United States.
The scale of the suspicious flows and the possibility that so much IMF cash
intended to prop up the tottering economy was diverted so quickly threaten to
make the scandal one of the most damaging of the post-Communist era.
The threat of a lawsuit is the latest blow to the Bank of New York, which
suspended two senior executives last week and is the subject of allegations
that it was used by the Russian mafia to launder vast sums of money.
In a further threat to its reputation, the Bank of New York faces a lawsuit
from shareholders in Inkombank, a Russian bank that collapsed under huge
debts last year.
A draft copy of the suit, obtained by The Times, claims that the Bank of New
York provided Inkombank officials with the means to loot hundreds of millions
of dollars of Inkombank assets and to funnel them to the offshore coffers of
The draft lawsuit makes a damning assessment of Russia's financial plight
since the collapse of the rouble a year ago. According to a draft:
"Plaintiffs will show that the current crisis in Russia, which devastated the
Russian economy and caused Western creditors and taxpayers the loss of
billions of dollars was not an act of God, but a meticulously planned
conspiracy in both Russia and the US."
The Bank of New York has suspended two executives: Natasha Gurfinkel
Kagalovsky from its New York office, and Lucy Edwards in the London office.
One Russian source said that Ms Edwards had been sighted in the Palace Hotel
in Moscow at the weekend, although her presence there could not be confirmed.
British police said yesterday that her passport and that of her husband,
Peter Berlin, who has also been linked to the investigation, had not been
USA Today reported yesterday that the money-laundering investigation could
involve as much as $15 billion and that as much as $10 billion of this could
come from diverted IMF funds. The total sum lent by the IMF to Russia since
1992 is $20 billion. The paper also claimed that a source within Britain's
National Criminal Intelligence Service (NCIS) had confirmed that the probe
was targeting five present or former members of Mr Yeltsin's Government.
However, John Abbott, director general of NCIS, denied that any of his
officers had been spoken to by USA Today.
August 28-September 3 1999
[for personal use only]
Fuelling Russia’s economy
THEY pretend to pay us, we pretend to work. This half-serious summary of
communist economics contained a kernel of truth: for Soviet workers, the
freedom to pilfer and dawdle made up, to some extent, for empty shelves and
wretched wages. Like other illusions, it served a purpose for a while, though
that could not last. Since the Soviet collapse, a different sort of illusion
about the Russian economy has been cultivated in western capitals as well as
in Moscow: “You Russians pretend to be creating a law-based, market-friendly
liberal democracy. We westerners pretend to believe you—and what’s more, we
pay you for it.”
This new fiction has also served a purpose. By fostering a climate of
determined optimism, both the American and Russian governments persuaded
voters and sceptical legislators that the promised land of prosperity and
reform was just round the corner. That was politically expedient. But
whatever its virtues, the post-communist illusion was likewise doomed to be
shattered—if only because Russians and Americans had such different
expectations about the “promised land”. Americans were led to believe that,
for an outlay of a few billion dollars, Russia could be transformed into a
country in their own image: open to American business and co-operative with
American diplomacy. Russians were encouraged to think they could enjoy the
benefits of a market economy without the hard slog; and that economic
strength would enable them to flex their muscles, and defy America, on the
Any remaining illusions about the efficacy of western-backed reform in Russia
have been evaporating over the past few weeks with exceptional speed. Soon
there may be nothing left of them, and Russian-western relations will have to
be rethought from scratch. The final blow could be the broadening probe by
America’s federal authorities into one of the largest money-laundering
scandals they have ever uncovered: the apparent use of accounts at the Bank
of New York, as well as at several European banks, to process about $10
billion in ill-gotten Russian gains. The authorities also want to know
whether the Bank of New York was one of a chain of banks through which at
least $200m may have been diverted from credits granted to Russia by the
International Monetary Fund.
This follows an acknowledgment by the Russian central bank that it channelled
tens of billions of dollars, including money received from the IMF, into a
shadowy offshore company in Jersey—which then speculated in a lucrative
government-bond market that the central bank was supposed to be regulating.
The IMF’s admission that “we were lied to” by the Russian central bank about
the location of $1 billion in foreign-exchange reserves in 1996 has done
nothing to allay the suspicion that worse happened both before and after.
In one of history’s odder political alliances, American Republicans and
Russian Communists are questioning the IMF’s $4.8 billion emergency payout to
Russia last year. This failed in its stated aim of shoring up the rouble and
probably provided windfall profits for Russia’s financial oligarchs. With
elections looming in both Russia and America, skeletons may come tumbling out
of cupboards at a faster pace than anyone in the Kremlin or the White House
Far from “civilising” the wreckage of the Soviet economy, economic
transactions between Russia and the West are running the risk of corrupting
the western side, if only by forcing it to wink at practices that would be
outlawed in more established economies. There is a particular irony in the
fact that one western party is the IMF, whose stated purpose is to propagate
the virtues of sound economic policy and good governance. But if the IMF’s
integrity has been compromised, the cause does not lie in its own sloppy
controls; it lies in the collusion of the American and Russian governments to
cover up failures and press the Fund into treating Russia with greater
generosity than its economic performance would warrant.
Better make the deals honest, and bilateral
The fibbing cannot go on forever, if only because both Russia (however
imperfectly) and America are lively and rambunctious democracies. The Clinton
administration should clear the air and admit some hard truths about western
policy towards Russia. The real aim is not to create ideal outcomes, but to
avert catastrophe: a hardline coup, a civil war, a nuclear leak. Avoiding
disaster in a country with tens of thousands of nuclear warheads is
undeniably a worthy aim of policy. But if this is the main purpose of credits
to Russia, then America and other western nations had far better say so
rather than pretend to be rewarding Russia for its government’s
less-than-impressive economic achievements. This suggests that western
governments should be prepared to take responsibility for whatever emergency
aid they give to Russia, rather than force the IMF to engage in games of
A policy based explicitly on saving Russia from self-destruction carries
risks too: it creates an incentive for Russia’s rulers to engineer situations
that are fractionally short of disastrous, and then extort credits from the
West. But if western governments suspect the Russian government of playing
this game, they should voice their suspicions—and make sure the Russian
electorate gets the message. That is better than conspiring with the Kremlin
to deceive voters in both countries.
Date: Thu, 26 Aug 1999
Subject: Merry on Russian Succession Scenarios
From: email@example.com (Ray Smith)
The logical conclusion of Wayne Merry's argument in JRL3464 that Yeltsin is
motivated by the desire to retain power personally is that Yeltsin will not
turn his office over to Putin or anyone else. I share Wayne's view that a
Primakov/Luzhkov elected succession would be the optimal scenario. We
should view them as Gaullists, not as unreformed Soviet imperialists.
France may be infuriating at times, but it is not the enemy. But I read
Yeltsin and the problem of succession a bit differently.
I'll take my own stab at reading the tea leaves of Yeltsin's mind. On the
one hand, he likes having power; on the other, his ego is gratified at the
notion of being the first elected President to hand over power to an elected
successor. Given his frail health, the latter motivation would probably
prevail, except (and this is a big except) that he is afraid he and his
immediate family (no quotes, blood prevails here) will at best lose their
wealth, at worst go to jail when he is no longer in power. This fear arises
from Yeltsin's classically Russian understanding of power. It is all or
nothing. If you have it, you can do what you want. If you don't, anything
can be done to you. You are protected from the inimical use of power
against you not by law, custom or promises, but by the kind of personal
relationship you have with the person who has power.
Primakov understands this fear and is trying to address it. But Yeltsin
does not believe Primakov's promises will necessarily be kept if Primakov
becomes President (and believes it even less if Luzhkov should succeed).
For reasons that only he and his family know for sure, he appears to believe
that his personal relationship with Putin is such that as President Putin
would protect him and those close to him. Unless a way can be found to
assuage Yeltsin's fears, the probability of a fairly-conducted Presidential
campaign and balloting process are not high. If I were making US policy,
I would be quietly, but at a very high level, telling every one of the key
players in Russian politics that they need to find a way to convince Yeltsin
that whoever succeeds in a democratically-conducted election will protect
him. While I don't normally think that foreign leaders need or want US
advice on their own domestic political process, in this case the stakes are
very high and some of the alternative scenarios are pretty ugly.
Yeltsin hails 50 years of Russia A-bomb
MOSCOW, Aug 26 (Reuters) - President Boris Yeltsin on Thursday lauded
Russia's nuclear scientists ahead of Sunday's 50th anniversary of the first
Soviet atomic test, with the whiff of Cold War politics still in the air.
``By their selfless labours half a century ago, our scientists, engineers,
workers and military personnel laid a powerful basis for Russia's nuclear
shield,'' Yeltsin said in a statement.
``In the most difficult conditions, in the shortest time, they succeeded in
resolving a complex scientific and technical task -- unlocking atomic
energy,'' he added.
Despite the end of the Cold War, Itar-Tass news agency quoted the First
Deputy Atomic Energy Minister Lev Ryabov saying that Moscow ``must keep its
powder dry'' in light of hard-ball U.S. tactics in recent arms-cut talks.
Last week Russia said talks on a START-3 nuclear arms cut treaty were a
failure due to U.S. requests to discuss amendments to the 1972 Anti-Ballistic
Missile Treaty so that Washington can build anti-missile defence systems.
The logic of the ABM treaty, a corner stone of the Cold War's uneasy peace,
was that building anti-missile systems would accelerate the arms race as each
side would build more and more missiles.
After World War Two, Soviet dictator Josef Stalin decided to turn his state
into a nuclear power to beat the danger of a U.S. pre-emptive strike and
protect the growing Communist empire.
The success of Soviet scientists triggered a nuclear arms race, during an
uneasy peace between the West and the Soviet bloc which lasted for decades.
The Soviet Union collapsed in late 1991 and Yeltsin became the first
president of a democratic Russia, to Western acclaim.
That euphoria has long since dissipated amid Russian resentment over U.S.
domination of the post-Cold War era and over its failure to rebuild its
But Russia remains the second-largest nuclear power.
Ryabev was also quoted by Tass saying that nuclear weapon output had been cut
by 10 times, due to post-Cold War disarmament.
Workers in the nuclear arms industry would fall to 35,000 from 75,000 by 2005
and only two of a current four nuclear weapons plants would remain open, he
From: IRASTRAUS@aol.com (Ira Straus)
Date: Thu, 26 Aug 1999
Subject: Re: Arguments for break-up (JRL 3460)
When it comes to the break-up of Russia, we are seeing frequent use of a
whittling-down, piecemeal style of argument. The case is made that it doesn’t
really matter very much and it isn’t worth the trouble to try to prevent a
break-up, by the method of taking up a number of fears and saying in each
case that it is exaggerated or misplaced.
This style of argument has a surface plausibility, even a tempting character
for an exhausting country. But it is misleading.
In an argument of this kind, the various fears about the dangers of break-up
are treated individually, as if they were unconnected. In each case, reasons
are found for saying that the fears are unsophisticated, emotional,
oversimplified, imperialist, exaggerated, naive, a result of unexamined
assumptions, etc. The counter-arguments are usually plausible on many of the
individual points, and the other points seem to get carried with the flow.
But before we also go along with the flow, we need to remind ourselves that,
if even a single one of the counter-arguments is inadequate, then the whole
argument for accepting a break-up is invalid.
In "Russia Doesn't Need Dagestan" (JRL 3460), Ustina Markus uses the
whittling-down, piecemeal style of argument. It contains several weak links,
but as I have said, it only needs one to make the case fail. Here is one:
"[Would] allowing regions to secede have a domino effect...? This argument
appears fallacious... Most regions rely on subsidies from Moscow and prefer
to stay in the fold... Even non-Russian regions adjoining Chechnya and
Dagestan are not seeking separation from Moscow. Ingush President Ruslan
Aushev ... and his North Ossetian counterpart, Aleksandr Dzasokhov joined
forces in calling on their constituents not to allow themselves to be dragged
into conflict through 'provocation.' Both areas rely on subsidies from
Moscow, and would undoubtedly prefer to stay within the Russian Federation
rather than join the messy Chechen-Dagestani Islamic Republic."
But that’s just the point. The Dagestani leadership would have preferred to
stay in the Russian Federation, too. So would the bulk of the people of
Dagestan, judging by all the evidence of the last few weeks. Yet none of this
prevented the current Islamist rebellion in Dagestan, conveniently sponsored
from Chechnya. Why should it stop the same thing from happening in Ingushetia
Ingushetia and Ossetia are afraid of getting "dragged in" precisely because
there are already signs of efforts by militants, local and Chechen, to drag
them in. This would be done just in the same way that a few local and Chechen
militants have dragged in the Dagestanis.
If the militant cause in Dagestan is allowed to succeed, there is no reason
why it cannot expect to succeed elsewhere as well. Far from disproving the
likelihood of a domino effect, these examples confirm it.
And then there are the cumulative consequences of each secession. Sure, it
seemed better to give up on Chechnya, and there were really weighty reasons
for giving up in that case. But now we have to add the conflict in Dagestan
to the costs of letting Chechnya go. And if Dagestan goes, there will be
still more costs down the road.
Chechnya has afforded basing too cheaply for the militants who have proceeded
to invade Dagestan. (It has also served as a base for gangs of criminals and
kidnappers who have made life more dangerous for all Russians and Europeans
in the area). An Islamist Dagestan would double their base and give them
additional access routes to other regions.
After Dagestan, the problem would move on to the next region or regions. The
triumph of the militants would by then have an aura of inevitability, and
could be considerably more difficult to stop at such a late stage than it is
at present. The same arguments would be made, with even better reason, about
how it would be more cost-effective just to give up those regions…
The whittling-down style of argument, which takes up the costs piece by piece
and saying that no single piece matters very much by itself, does not face up
to these cumulative effects. It rules them out of consideration. Yet in
reality, every decision to give up a territory runs a risk of cumulative
strategic effects. It means from the start a loss of influence for oneself
and a gain in influence for all other forces. It also means a loss of
capabilities and opportunities for one's own forces, mirrored by an increase
of opportunities for present and potential adversaries. These costs not only
add up, they build on one another.
It is one thing if one is giving up the territory to a stable and sedentary
society, one with no significant likelihood of succumbing to hostile or
aggressive ideologies, and with a stable satiated European Union to its rear.
(Even in such a favored case, one still has to weigh the possibility that the
adversarial relation with the West will not be completely overcome and that
the gambit of abandoning empire will prove a mistake.) It is another thing
when one is talking about giving up a region with a different religion, a
less sedentary way of life, and Islamic states in its rear. In this case, one
has to assume that the cumulative negative effects have a high probability of
From: firstname.lastname@example.org (Henry Hale)
Date: Thu, 26 Aug 1999 19:12:00 -0400
Subject: Harvard's Russian Election Watch
Harvard University?s Strengthening Democratic Institutions (SDI) Project has
begun publication of a monthly bulletin on the Russian elections, Russian
Election Watch. Our aim is to provide concise information and incisive
during the Russian election season. Each month?s issue will include the
polls, a summary of the most important events of the campaign, analysis from
leading Russian political commentators, interpretations of key events
directly by the top parties themselves, and more.
Our introductory issue, designed to get our readers up to speed on the
the game and the main players, came out last month and is available on our
website (www.ksg.harvard.edu/bcsia/sdi). The next issue, which will add our
Russian expert commentators, will come out on September 1. We invite you and
your readers either to visit our website regularly or to sign up for a free
subscription to the bulletin, which will be circulated electronically, by
sending an email message to Emily_Goodhue@harvard.edu. The message should
contain the words "Subscribe Election Watch" in the subject line. In the body
of the message, please provide the following information:
Preferred Email address
Henry E. Hale, Ph.D.
Strengthening Democratic Institutions (SDI) Project
John F. Kennedy School of Government
Financial Times (UK)
August 27 1999
[for personal use only]
RUSSIA: The tricks Russians use to funnel cash abroad
Secreting of money abroad is now so rife it blurs the line between money
laundering and capital flight, writes Andrew Jack in Moscow
"Sergei" is planning to sell his apartment in Moscow within the next few
weeks, and he is worried about getting a good price for it. But he has no
concerns at all about how to circumvent Russia's theoretically tight currency
controls and get the money out of the country.
"I'll take the cash to a series of different banks to buy [rouble]
travellers' cheques, make a note of the numbers, rip them up, flush them down
the toilet and then call the company to say they were stolen and pick up
[hard currency] replacements once I'm abroad," he says casually.
Last week, the New York Times suggested that up to $10bn in money linked to
suspect Russian sources may have been laundered through the Bank of New York
since the start of last year, some of it via a company called Benex. "There
has been an enormous silence around these allegations," says one Moscow-based
diplomat specialising in economic affairs. "That's because it's just accepted
that everyone is not paying their taxes and is sending money abroad."
In fact, it is believed that only a small percentage of the $10bn allegedly
funnelled through Benex was the product of criminal activities, such as
prostitution and extortion. The remainder may have come from a wide range of
activities that cross the gamut of legality. One Russian businessman recalls
being referred to a contact by an old schoolfriend a few months ago when he
wanted to swiftly transfer money out of the country without dealing with the
$2,000 daily limit and cumbersome paperwork of the Central Bank.
"I was shown into a backroom in a currency exchange office in central Moscow
to discuss an 'additional service'," he says.
For a small commission, his cash was channelled via a Russian bank into the
Benex account at the Bank of New York, and arrived at its destination within
"I think many people did the same thing through a network of commission
agents working for several dozen mid-sized banks, which used Benex and other
companies with similar names," he says. "To hear that mafia money was
allegedly involved completely surprised me."
In Russia, where even making a profit was considered a criminal offence a
decade ago, the divide between legal and illegal activities can be difficult
Ingenious schemes to convert roubles into dollars and export them are
widespread and used by very diverse groups of people.
Such capital flight embraces mafia villains and corrupt executives stealing
money from their shareholders and partners, employees and the tax authorities
alike. But it also includes more honest businessmen trying to survive amongst
throttling and contradictory legislation, and even ordinary citizens trying
to protect themselves from the vagaries of living in one of the most
uncertain countries in the world.
The mechanisms they use highlight the blurred distinctions that exist in
Russia between the public and private sectors, and the complicated trail that
involves top international banks in the world's leading financial capitals
alongside a web of domestic companies and trusts in offshore tax havens.
A study by the Institute of Economics of the Russian Academy of Sciences and
the Centre for the Study of International Economic Relations at the
University of Western Ontario, published this May, suggested that up to $70bn
disappeared in 1992 and 1993 alone. Other specialists argue that total
capital flight in 1994-98 amounted to more than $140bn, and currently is
running at over $15bn a year.
Towards the end of the Soviet period, the organs of state actively laundered
unquantifiable sums of Communist party money abroad. With the collapse of the
USSR, the Russian Central Bank itself was left with a system of overseas
commercial banks and offshore entities. Through the Jersey-based Fimaco, for
example, it purchased government securities and discreetly carried out a
series of transactions that manipulated its foreign reserves and deceived the
International Monetary Fund.
However, the leakage of resources in the early 1990s came largely through the
enormous difference between Russian and world market prices for commodities,
which was exploited by "red directors" in charge of the country's industrial
companies and enjoying new-found liberties. The break-neck liberalisation of
the economy easily outstripped regulatory efforts to catch up and stem
capital flows. Natural resources were exported with little of the value
recouped by the state in taxes or customs duties, and the foreign currency
revenues earned were rarely repatriated.
According to figures from the Moscow-based brokerage Troika Dialog, Russia's
15 largest companies - all exporters of oil, gas, iron, aluminium and nickel
- last year generated $24bn in export earnings alone or 32 per cent of the
country's total exports. Even as regulations have become more sophisticated,
the economic weight of these groups has given them enormous political clout
to limit the duties they pay to the state.
Under a classic "transfer pricing" scheme - or "tolling" as it was dubbed in
relation to aluminium exports - a Russian company sells its commodities at
considerably below market price to an offshore group that it controls. That
intermediary then sells them on at the international price, and the foreign
currency proceeds never need enter Russia at all. Kazakhstan has accused
TransWorld Group, a London-based company which operated the republic's
aluminium mills in the early 1990s, of transfer pricing, although the company
vigorously denies it.
There is also ample scope for other forms of abuse.
Groups can carry out domestic "transfer pricing," selling their goods at
below cost to a Russian intermediary company that is controlled personally by
a few executives, depriving the shareholders of the original company of their
profits. The goods can then be exported at a fair market price.
If transfer pricing understates the true value of goods that are exported, to
minimise the amount of foreign currency that should legally be re-exchanged
into roubles, an alternative approach is to overstate expenses. So-called
"bogus service agreements" involve an offshore company - often set up by an
intermediary that takes a commission for its efforts - offering fake
consulting services to its Russian "client". That allows money to be
exported, while the bills "paid" by the Russian company reduce the domestic
profits on which it is required to pay tax.
Andrei Liakhov with the law firm Norton Rose described an alternative
approach. "A Russian company can set up a Cyprus company, sell shares to it
and then pay out a very generous dividend. That provides a perfectly legal
way for the Russian company to get its money out of the country, and under
the terms of the treaty, dividends are not taxed in Cyprus. All you need is a
creative accountant with a wild imagination, and a couple of people on the
payroll of various inspection and control bodies."
A significant item in Russia's balance of payments statistics - a category
which rarely even exists in other countries - is labelled "export revenue
arrears and uncovered import advances". Much of this is the result of
companies that enter into "contracts" and pay for goods in advance in hard
currency. Then, as one accountant wryly said: "Tragically, the goods
disappear or are stolen, and there is nothing you can do." The company has to
write off their cash as a "bad debt" - at least for the purpose of the
accounts made available to the Russian authorities.
Another approach is to ensure that all business remains offshore. A number of
Russian entities - including some more or less directly linked to government
departments - keep their rouble earnings to a minimum by getting clients to
pay them directly into offshore accounts.
Some foreign organisations have set up a "representative" office in Moscow,
which carries out work and bills its services at cost plus a minimal fee to
an offshore subsidiary. This subsidiary in turn sends a much larger invoice,
including the profit margin, to the client, who settles it outside Russia.
But Russian companies have taken the practice further still.
Internationally-oriented businesses with foreign operations and income
generated abroad have a right to keep some currency in an entity outside the
country. By setting up an intermediary company which makes a "loan" to this
entity, the repayments cover part or all of its income, eliminating the need
ever to repatriate foreign profits into Russia.
Russian prosecutors are scrutinising an arrangement of this kind at Aeroflot,
the Russian airline, and its relations with the Lausanne- based Andava. Both
the Russian and Swiss companies deny any wrongdoing.
Other mechanisms for exporting currency from Russia include simple fraud,
such as smuggling commodities without making any declarations to the
authorities. Oleg Babinov from the Risk Advisory Group, a business
intelligence consultancy, highlights the important role played by Russian
banks, whose numbers grew rapidly from just a handful of state-owned
institutions in the early 1980s to many hundreds that were
privately-controlled a decade later.
Exploiting the rudimentary clearing system that existed, he says, they would
fax or telex doctored payment instructions for inflated amounts to the
Russian Central Bank for settlement. By the time the original document for a
far smaller amount arrived, the higher sum had already been transferred and
sent offshore. Legal weaknesses and abuses at the time limited the Central
Bank's capacity to recover the funds.
Today, with over 1,400 banks registered across the country, most significant
Russian exporters control their own financial institutions, which directly
manage their transactions abroad. That provides considerable scope for
circumventing currency export regulations and minimising duties.
A senior adviser to the Russian government put it bluntly: "In more developed
countries, you rely on banks to provide information. But it is highly
questionable whether that can work in Russia until you have built a banking
system with greater control and integrity."
"If you have the right permission from the Central Bank, even if there's a
sniff of impropriety, if all the permissions are there, there is little or
nothing the authorities can do," said one Moscow accountant. "When you have a
form-over-substance society focused on implementation of the strict letter of
the law, it's a lot easier to play these kinds of tricks."
Given the low salaries paid to tax, customs and regulatory officials, the
potential for corruption is high, whether in the preparation of currency
export licences and customs clearance documents or simply turning a blind eye
at the border. But even if companies are caught, there is always what one
professional adviser dubbed "the banya solution," with financial or other
arrangements sealed in an informal meeting in a traditional Russian bathhouse.
Yevgeny Primakov, former prime minister, claimed last year that up to 45 per
cent of the country's economic activity was generated through "criminal
structures". But it would be dangerous to assume that the largest proportion
of capital flight was the result of illegal activity. One of the most
widespread sources - both in terms of the number of individuals involved and
the volumes of cash - is perfectly transparent and takes place in full
daylight across Russia every day.
After years of braving swindlers and police spies in secretive transactions
on street corners during Soviet times, Russians can now legally exchange
money at the tens of thousands of tiny currency exchange points that operate
day and night in Moscow and in cities across the country.
Researchers suggest that this form of "internal" capital flight accounted for
$24bn in the peak year of 1997. The attraction of exchanging rouble savings
into cash dollars for the ordinary Russian lies in the fact that the rouble
exchange rate has been unpredictable and Russian banks are not trusted. The
dollars were put in pickle jars or under mattresses, to be converted back to
roubles as needed.
Other Russians - ordinary and less so - found ways to send money abroad using
intermediaries who channelled cash through companies such as Benex, one of
the businesses which held an account at the Bank of New York.
Not all money transferred into dollars or held abroad is lost to the Russian
economy, however. Anonymous trust funds often registered in Cyprus and other
offshore havens investing in Russia often conceal Russian citizens. Some cash
does come back in different forms. But as long as the political, economic and
regulatory status of the country remains so fragile, it is not surprising
that much remains firmly abroad.