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4 September 1999
[Note from David Johnson:
1. Financial Times: US/RUSSIA: A chilling friendship. Stephen Fidler and
Lionel Barber examine what can be salvaged from the US-Russia relationship.
2. Paul Kindlon: Three reasons why Yeltsin will resign within the next
3. Yale Richmond: U.S.-Soviet/Russian Exchanges.
4. New York Times: Boris Nemtsov and Ian Bremmer, Don't Jettison Russia
5. Washington Post: Jim Hoagland, Politics Of the Russia Scandal.
6. AFP: Russia scandal highlights loopholes in international finance system.
7. Business Week: Patricia Kranz and Margaret Coker. The Tidal Wave of
Cash Gushing Out of Russia.
8. Chicago Tribune Editorial: REQUIEM FOR A SPACE STATION.
9. Los Angeles Times: Maura Reynolds, Savvy Russians Find Variety of Ways
to Spirit Cash Out of Ailing Nation.]
Financial Times (UK)
3 September 1999
[for personal use only]
US/RUSSIA: A chilling friendship
Stephen Fidler and Lionel Barber examine what can be salvaged from the
Eight years after the collapse of the Soviet Union, relations between the
US and Russia are entering a dangerous new phase.
The much vaunted "strategic partnership" that has nuclear deterrence at its
core threatens to unravel.
Russia is economically weak, Boris Yeltsin, its president, is ailing, and
the country and its leadership is widely seen in the west as crippled by
corruption. An alleged giant money laundering ring involving New York
banks, now being investigated by federal investigators, has served to
reinforced the view.
In both Washington and Moscow, lame duck administrations struggle to keep
the relationship on track. Elections for Russia's parliament, the Duma, are
set for December and presidential elections next June. Meanwhile, the US
election campaign is getting under way and the Clinton administration's
record is coming under scrutiny.
Predicting where US-Russian relations are heading in this environment is
impossible, but there are few expectations that much can be salvaged until
new administrations are in power in both countries.
What is certain is that relations between the two powers have deteriorated
to a degree unforeseen at the time of Communism's demise. President Bill
Clinton - and his vice-president Al Gore - are likely to take their share
of the blame.
Peter Reddaway, professor of political science at George Washington
University, says the deterioration of US-Russia relations has come about in
Between 1992 and 1998, Russians became gradually more and more alienated
from the west, which they blamed for impoverishing them by imposing
economic shock therapy. This year, says Prof Reddaway, it was the conflict
in Kosovo that estranged the Russian elite from the west.
The latest stage, dominated by allegations of money laundering, has Russian
politicians seeking popular support by claiming that Washington is
Part of this deterioration was perhaps inevitable. As participants at a
recent meeting of US-Russia experts at the Aspen Institute agreed, the
"strategic partnership" has also been an unequal relationship.
The continuing US economic boom has contrasted sharply with chronic Russian
weakness. Russia's entire federal revenues this year are projected to be no
more than $25bn - significantly less than the $35bn budget for New York City.
But according to a growing body of opinion, the difficulties have been
worsened by the Clinton administration's policy towards Moscow, a policy
whose main architects have been Strobe Talbott, deputy secretary of state,
and Lawrence Summers, now US Treasury secretary.
In an interview in the New York Review of Books last month, George Kennan,
the veteran foreign policy strategist whose thinking framed the US approach
to the cold war, criticised "the overpersonalising of the relationship -
treating it as if it all stood or fell with the fate of one or another
individual, Yeltsin or Gorbachev or whoever."
The concentration on personalities was not limited to "Bill and Boris", or
to Mr Gore's relationship with Victor Chernomyrdin, the former Russian
prime minister. Just as damaging in the view of critics has been the
chuminess between officials in the US Treasury and "reformers" within the
Most criticised of all is the particularly close relationship of a small
group of powerbrokers centred on Anatoly Chubais, the former first deputy
prime minister, and Mr Summers.
In linking himself to Mr Chubais, who is described as hugely unpopular
within Russia, Mr Summers identified the US with a group of westernised
Russian intellectuals, who it appeared wanted rapid economic change within
"The result is that many Russians have come to associate economic reform
and capitalism with looting, capital flight, and dubious activities in
which a handful of people benefit," says Janine Wedel, a Washington-based
academic and author.
But despite this, Mr Chubais's impeccable Washington connections seem
intact. When he visited in May, as head of a Russian electricity company,
he had meetings with Mr Summers, then deputy Treasury secretary, and his
then boss, Robert Rubin; with Madeleine Albright, secretary of state, and
her deputy, Strobe Talbott; and with Sandy Berger, Mr Clinton's national
security adviser. He also secured appointments with the top figures at the
IMF and World Bank.
The administration - and therefore Mr Gore - is also paying the price for
having oversold the "partnership" with Russia, its critics argue.
Administration officials say it has yielded benefits. Western co-operation
with Russia helped ensure Mr Yeltsin's victory in the 1996 elections,
thereby preventing a relapse into Communism. Thus democracy and a market
economy of sorts have been preserved in Russia.
Nuclear tensions have also been avoided after the collapse of the Soviet
Union gave rise to four nuclear states: Russia, Belarus, Kazakhstan and
Ukraine. All save Russia have now renounced nuclear weapons. Security
co-operation has been important in other areas too, of which Kosovo is an
Those who defend the administration's actions also point out that it had
little alternative but to deal with the elected president of Russia and the
people he appointed. When appointees such as Mr Chubais appeared competent
and had credible plans for reform of the Russian economy, it made sense for
Washington to engage them. Moreover, Washington was not making policy
decisions on its own: Germany, for its own strategic reasons, has poured
tens of billions of dollars into Russia.
But critics still question why official western money continued to be lent
to Russia without greater efforts to ensure it did not go astray. They
think the administration turned a blind eye to growing evidence of
corruption in Moscow so as not to jeopardise security co-operation between
the two countries. Gloomy analyses of what was happening in Russia, by the
CIA and other State Department officials, were blocked or ignored by the
administration, former officials say.
"What did we get for this bargain?" asks Fritz Ermarth, an expert in
Russian affairs who retired from the CIA last year. "Was it worth the price
of the desecration of the US in the eyes of that huge country?"
In the current fervid electioneering atmosphere, analysts fear the money
laundering allegations will serve to harden these already hostile Russian
public attitudes to the US. Igor Ivanov, Russia's foreign minister, said on
Wednesday the allegations were a western media attempt to besmirch Russia.
The public allegations surround the Bank of New York centre on money
laundering by organised crime syndicates. So far, they have not directly
suggested the involvement of what Mr Ermarth calls "authorised crime",
which would cover illicit gains made through rigged privatisations and the
But if the allegations broaden, they could intensify what some observers
see as already intense pressure on President Yeltsin to resign. If he does
not step down before the new Duma takes office after December, says Prof
Reddaway, he could well be impeached and convicted anyway. All this would
argue for a subtle US disengagement from Mr Yeltsin.
On the US side, the Federal Bureau of Investigation and the Justice
Department - still under attack for their performance in the Waco siege in
1993 - are under intense public pressure not to botch their investigation
into the money laundering allegations.
The prospect of hearings into the allegations led by Jim Leach, chairman of
the House Banking Committee, also has the administration on tenterhooks.
Against this background, Mr Summers raised the possibility this week that
the next instalment of IMF credit to Russia might not be disbursed as
scheduled later this month.
Cutting off Russia from IMF credit now would cause serious reverberations
in Moscow, raising the spectre of default and further devaluation.
That would also probably kill US efforts to gain Russian agreement on a
number of tricky nuclear issues. The most sensitive is the growing
probability that the US will decide to deploy a national missile defence
system, a decision that would require either the renegotiation or the
abrogation of the 1972 Anti-Ballistic Missile Treaty (ABM) between the US
and the Soviet Union.
Mr Clinton must make a decision on that by June 30 next year, and Mr
Talbott, along with senior Pentagon officials, is expected to head to
Moscow in the next few weeks for discussions.
The US has also signalled its intent to open talks on a new strategic arms
reduction treaty (Start III), though the Duma has yet to ratify Start II.
This is aimed at showing US good faith on offensive missiles in light of
the likely stand on ABM.
Among many Russian experts in Washington, however, there is little optimism
that while elections are looming in both countries, much headway can be
made on any of these issues. The best hope appears to be to prevent a
serious further deterioration in the relationship and hope that more stable
ties can be built by new administrations in Moscow and Washington.
Mr Ermarth argues that if the lessons from this decade are learned and the
relations are not damaged by the elections, a new administration - "even a
Gore administration" - could get the US-Russia relationship on to a more
Nobody expects an easy partnership even then. In the absence of any strong
pro-western candidates in Russia's presidential race, Mr Reddaway says the
best the US can expect is a successor to Mr Yeltsin more stable than the
incumbent. Only one thing is certain: Russia's next president is likely to
remain deeply suspicious of the west.
Date: Fri, 3 Sep 1999
From: "Paul Kindlon" <email@example.com>
Subject: 3 reasons
" Three reasons why Yeltsin will resign within the next two weeks"
If Yeltsin resigns by September 19th it will ensure a simultaneous
selection of Duma members and President during one election day on
December 19th leaving current Prime Minister Putin as interim President.
By doing so, the "family" will have time to assess further actions by
monitoring the progress of their candidate for President. If they see that
is trailing in the polls, they can then use his position to bring a halt to
entire process and cancel elections. Western governments will protest, but
who really cares? The family and hundreds of immensely rich other Russian
"families" will still have the ways and means to exert influence and power
while watching their fortunes grow. The robber baron class cannot be
brought down through mere criticism and idle "threats" from foreign powers
witholding IMF loans. These people do not need IMF money, Russia does.
Do the oligarchs really care about Russia ?
If the public shows no enthusiasm for a Putin presidency, the family
can easily use the new KGB ( FSB) in order to create a home-grown
scandal before the elections which will tarnish the image of the main
contender facing off against Putin. Or .. the FSB could even find enough
compromising materials to file criminal charges against such a candidate.
(They did it with former general prosecutor Skuratov afterall.) Putin is
perfectly positioned to do this special job, having been director of the
FSB and having already collected "Kompromat" to use against anti-
If Yeltsin DOES NOT resign, the likely outcome in the June elections
for President is a communist victory. Economic forecasts for the year 2000
are not good for the average Russian. Prices for petrol will rise even further
leading to an increase in food prices. By mid winter,the average Russian's
storage of Dacha - grown edibles will have been depleted and many will
struggle just to find enough food for the table. The rouble rate, moreover,
will be somewhere between 30 and 35. Real wages will continue to decline.
Even a less than charismatic Zyuganov will easily win election under such
circumstances and Zyuganov (unlike other candidates) has not given any
indication of granting amnesty or immunity to Yeltsin and his entourage.
I suspect the farewell speech has already been drafted.
Paul Kindlon, PhD
Moscow State Linguistic University
Date: Fri, 3 Sep 1999
From: Yale Richmond <firstname.lastname@example.org>
Subject: U.S.-Soviet/Russian Exchanges
In her "Russians Get Lessons in Democracy" (JRL 3479), Katherine
Pfleger has it wrong. "After World War II," she writes, "the Marshall
Plan that rebuilt Europe also brought German leaders to the United
States to learn about democracy. But it took nearly a decade after the
Cold War ended for Russians to be invited for a close-up view."
The Marshall Plan did indeed bring many Germans to the United States,
mainly for economic recovery training, but it was the State Department,
through its International Visitor and Student Exchange Programs, that
brought thousands of Germans to the United States for the express
purpose of democratization. Those programs, we now know, were a great
Similar exchange programs were conducted with the Soviet Union,
beginning in 1958 with the signature of the first US-USSR "Agreement...
for Cooperation in Exchanges in the Cultural, Technical, and Educational
Fields." Under that agreement, which was periodically renewed into the
1980s, many thousands of Soviet citizens came to the United States and
an equal or even greater number of Americans went to the Soviet Union.
I worked on both the German and Soviet exchange programs, and both were
very large indeed.
Exact numbers for Soviets who came to the United States under those
programs are difficult to determine. In the early years of the exchanges
the State Department kept accurate records and published the numbers in
semi-annual reports--in a typical year, about 1000 Soviets came to the
United States. But beginning in 1972, with detente and the signature of
11 US-USSR cooperative agreements in various fields of science and
technology, the number of Soviets to the United States increased
dramatically for both U.S. government and privately sponsored programs.
And because we could no longer keep an accurate count, we discontinued
the reports. Nevertheless, by conservative estimates, some 50,000 Soviet
citizens came to the United States under various exchange programs
between 1958 and 1988 for periods of a few weeks to an academic year,
and most were people with higher education.
Were the Soviet exchanges as successful as the German? As I will show in
a book I am now writing, Cultural Exchange and the Cold War, those
exchanges brought changes to the Soviet Union that, over a period of 30
years, helped to prepare the way for the reforms of the 1980s, and at a
fraction of the cost of U.S. expenditures for defense and intelligence
over the same period of time.
Exchanges are still important today as a new Russia emerges and seeks to
define its relationship to Europe and the United States, but they should
be seen as part of a continuing U.S. effort that began in 1958.
New York Times
September 3, 1999
[for personal use only]
Don't Jettison Russia Just Yet
By BORIS NEMTSOV and IAN BREMMER
With the year 2000 bringing presidential elections in both the United States
and Russia, the emerging scandal over the possible laundering of billions of
dollars from Russia through the Bank of New York has, predictably, already
prompted a politically tinged search for scapegoats. And in both countries,
the leading culprits are the same -- the Democrats and the "democrats."
In Russia, President Boris Yeltsin's administration, through inept governance
and suspected corruption, has managed to give reform a bad name. The
opposition, frustrated in its efforts to break Mr. Yeltsin's power, has taken
to blaming "democrats" and their accomplices in the West for the country's
In the United States, the problem is different, but the tactic of the
opposition is the same. A strong economy, victory in Kosovo and the nagging
suspicion that Monicagate may have helped more than hurt the Democrats have
left the Republicans in a quandary: how to set upon the Clinton record
without seeming priggish, pharisaical and small? The answer of the moment
seems to be to focus on the Administration's fascination with and support for
a limping Russia, particularly the prominent role of Vice President Al Gore.
Is this the end of the entente between the United States and Russia? Should
the West continue to provide aid? Won't International Monetary Fund dollars
end up in the hands of Russian mobsters?
Before we write off the relationship, we should remember that the Russian
economy is moving very slowly to a free market. The billions of dollars that
have left Russia in the past decade will never come back if Western
governments bury their heads in the sand, and they will come back only if and
when Russia becomes an integrated part of the global economy.
Western governments should recognize this and focus spending where it can
make the greatest difference. The West could finance institutional support
through Western nongovernmental organizations -- NGO's -- and multinational
corporations operating in Russia, keeping money out of the hands of the
corrupt elite while providing the intellectual and physical infrastructure of
a market-based economy. The I.M.F. could take the money earmarked for
defending the ruble and use it to finance a micro-loan program aimed at
building a middle class, creating a tax base so that the Government can meet
it debt obligations (finally putting the horse in front of the cart).
Russia's Soviet-era debt could and should be forgiven.
But at the same time, there must be accountability. The I.M.F. has made clear
that it hasn't the ability to follow money once it goes overseas. The
American and Russian intelligence communities should form a joint
investigative body to track Western money -- through Russia, through the West
and through offshore sources.
Yuri Skuratov, who was dismissed as Russian Prosecutor General earlier this
year after pressing an investigation of Mr. Yeltsin's inner circle, has said
that the Russians will not cooperate in such an effort. Certainly there is
little reason for President Yeltsin to initiate it. But if an official
proposal comes to Moscow from the Clinton Administration, it would be
politically difficult for Mr. Yeltsin to say no.
The investigation now under way in the United States will, it is hoped,
determine where the money that went through the Bank of New York came from.
Our theory is that Russia's ill-fated treasury bills -- the G.K.O.'s -- will
account for much of it.
The bills were canceled after the fiscal crisis in August 1998, but
convertibility continued for several months. Russia's elites knew that they
needed to get their money out fast, and as insiders they knew exactly what to
do. Insider trading is deplorable, especially given its compounding effect on
the long list of ills brought upon Russia's economy by its oligarchs. But
there is a big difference between the politically savvy flight of capital and
money laundering. Russia simply doesn't have the institutions in place to
regulate these transactions properly. This should be a priority for the
All of this is very different from the allegations of corruption involving
those in and around the Yeltsin family. Here America's role must be carefully
balanced. The United States has been remiss by supporting the first
democratically elected head of the Russian state instead of the processes and
institutions of democracy. The corruption allegations surrounding the Yeltsin
family should be discussed frankly and with vigilance. This does not mean
Russian reform is at an end.
We should keep our heads about us. Michel Camdessus, the I.M.F.'s managing
director, has stated that in its initial scrutiny of the Bank of New York
case, the I.M.F. has found no indication that loan money was involved.
Russia's relationship with the West is much more important than presidential
politics in either country. Let's not blame the D/democrats for that.
Boris Nemtsov is a former First Deputy Prime Minister of Russia. Ian Bremmer
is a senior fellow at the World Policy Institute and president of Eurasia
September 3, 1999
[for personal use only]
Politics Of the Russia Scandal
By Jim Hoagland
Corruption has replaced cooperation as the central item on the U.S.-Russian
agenda. As a result, the Clinton and Yeltsin presidencies stumble toward
their final days with diminishing hopes of improving a disappointing seven
years of political intimacy and strategic estrangement.
Corruption investigations in New York, Switzerland and Moscow have spawned
press allegations that threaten to undermine a set of September high-level
contacts that once promised to repair the battered strategic relationship.
The investigations have taken on a life of their own as the corruption
reports reach a journalistic critical mass. They could poison the politics of
both nations in presidential election years, whatever the final criminal
Instead of moving forward on arms control, military-to-military relations and
economic aid this month, the U.S. architects of the Bill-and-Boris
partnership are busy defending their own reputations and trying to halt the
spread of political damage from these scandals to Vice President Al Gore.
The policy outlook is just as dismal on the Russian side. In Moscow,
Yeltsin's latest prime minister and his chief diplomat have rallied round the
Russian oligarchs caught in the investigators' sights. They accuse "political
forces" here of mounting a campaign to "besmirch our country, besmirch our
society, besmirch our business community and our entrepreneurs," in the words
of Foreign Minister Igor Ivanov.
"Political forces" is barely encrypted code for the Republican Party, which
does have much to gain from playing up Gore's involvement with the Yeltsin
government -- and may gain even more from the Russians' veiled defense of the
vice president in this political season.
A Russian attack on the FBI inquiry at the Bank of New York is manna for
George W. Bush and company. Bush now has a key element any outside
front-runner needs to dislodge an incumbent regime: a mess to clean up once
he is elected.
In the era of globalization, the fact that the mess is in Moscow is a detail:
Bush can rush to defend the Bank of New York investigation against "political
circles" who would "besmirch our society," i.e., the Kremlinite Friends of Al.
This is the political baggage Deputy Secretary of State Strobe Talbott must
now carry on his once greatly anticipated trip to Moscow on Sept. 7, where
Talbott was due to try to nail down a significant arms control agreement with
the Russians. That strategic accomplishment has eluded the Clintonites, who
had seen signs in recent weeks of a potential legacy-enhancing deal taking
Russian politicians have been signaling that Moscow would be willing to
discuss U.S.-suggested changes in the Anti-Ballistic Missile Treaty in return
for consideration of the Russian desire to move directly to a Strategic Arms
Reduction Treaty (START III) that would limit each nuclear superpower to the
Russian-suggested total of 1,500 intercontinental nuclear warheads.
Talbott was reportedly authorized to explore this linkage, which would
involve leapfrogging the START II treaty now stalled in the Russian Duma.
Two other key meetings are to follow in quick succession:
Defense Secretary William Cohen is scheduled to visit Moscow on Sept. 13, in
part to reduce the tensions that developed between the U.S. and Russian
military establishments over the NATO war in Kosovo.
And President Clinton will have his first meeting with Vladimir Putin,
Yeltsin's fifth prime minister in the past 18 months, on the sidelines of a
Pacific Rim trade summit in New Zealand in mid-September.
Clinton and Gore quickly found previously hidden streaks of brilliance and
statesmanship in each of Putin's predecessors -- right up to the moment
Yeltsin brutally pushed them overboard as they began to threaten him or
proved insufficiently zealous in protecting him from spreading corruption
Putin, a career KGB officer before entering politics, does not seem to have
been effective in shutting off the Moscow investigations. Clinton may not
want to invest much time on long-term matters with Putin, or in building him
up as the administration did Yeltsin's presumed successive successors.
You don't need the FBI to uncover this administration's appalling
misjudgments over the past two years on what (as well as who) would come next
in Russia. Strategic matters were too important to Clinton's team to be
derailed by concerns over corruption. Now uncovering and punishing corruption
threatens to become the driving force in U.S.-Russian relations, leaving
strategic affairs twisting in a politically driven, unpredictable windstorm.
Russia scandal highlights loopholes in international finance system
PARIS, Sept 3 (AFP) - The scandal surrounding alleged massive Russian money
laundering has highlighted the need for greater efforts by the international
community to crack down on loopholes such as tax havens which make such
The Russian affair "could be a good thing" if it leads politicians as well as
international organisations such as the IMF and World Bank to act more
decisively in this area, said Patrick Moulette, head of the international
Financial Action Task Force (FATF) secretariat based at the OECD in Paris.
International leaders will have the chance to look at the issue again very
shortly, since the whole question of better international financial
regulation is on the agenda for the annual meetings of the IMF and World Bank
when they meet in Washington later this month.
The Asian financial crisis gave a new push to calls by the industrial
countries for reform to the international financial system, including ways to
ensure that massive movements of money across international borders could be
checked in a bid to control money laundering.
But that is easier said than done in a world where millions of dollars can be
moved in seconds at the push of a button -- and it can take literally years
for officials to trace a transfer of illicit funds if it passes through
several jurisdictions, particularly tax havens.
Such offshore centres offer low taxes and bank secrecy -- making them an
attractive home for your money whether you are seeking to avoid heavy tax at
home on legally-earned cash or looking for a hideout for criminal gains.
The 28-member FATF has frequently complained that while industrial countries
say they want to crack down on money laundering and the use of tax havens to
mask criminal financial activity, they have been slow to provide the
resources needed to combat heavily-funded mafias.
The tax haven problem was highlighted this week by allegations that Russian
officials were involved in transfers of up to 15 billion dollars of mafia and
possibly IMF loan money out of the country.
IMF managing director Michel Camdessus meanwhile accused the Russian central
bank of lying to the IMF about what he described as "legal but hidden"
transfers of cash to its FIMACO unit in Guernsey.
The industrial countries, through the FATF, have been seeking ways to put an
end to such tax havens for several years, and have stepped up calls for
action in the wake of the Asian financial crisis.
The amounts involved are huge. According to the OECD, investment from the G7
leading industrial nations (Britain, Canada, France, Germany, Italy, Japan
and the United States) in Caribbean and Asian offshore centres soared
fivefold in the decade to 1994 to 200 billion dollars.
French Justice Minister Elisabeth Guigou said this week that deposits in tax
havens worldwide now total some 8,000 billion dollars, "the equivalent of the
US gross national product."
Camdessus himself said Wednesday that it was "time for the international
community to look more seriously at the question of tax havens, which are the
lynchpins of mafia trafficking.
But the fundamental problem is a political one because many of the industrial
nations themselves have tutelage over tax havens, notably Britain in the
Channel Islands and the Caribbean.
This has led to an approach through the OECD and FATF which focusses on
persuading offshore centres to change their rules in line with international
practice rather than issuing blanket condemnation.
"You cannot stop money laundering completely in the world and it would be an
illusion to think that it was possible," Moulette said.
But the latest developments in Russia "should help" in FATF's current efforts
at drawing up a set of criteria to define non-cooperating countries, the
first step towards taking action to bring them into line.
Moulette said he hopes FATF members will agree on the criteria, covering such
areas as international cooperation, financial regulations, bank secrecy and
financial supervision at their next meeting in Portugal later this month.
Jurisdictions found not to meet the criteria would be judged
"non-cooperating" and pressure would be put on them to change.
How far such pressure would go has yet to be seen. France has gone so far as
to suggest banning financial dealings with recalcitrant offshore centres, but
with little sign of support so far. Moulette said this "fairly revolutionary"
proposal had not yet been debated by FATF members.
But "we are arriving at a stage where the measures required will be radical,"
September 13, 1999
[for personal use only]
Commentary: The Tidal Wave of Cash Gushing Out of Russia
The Russian money-laundering scandal is grabbing headlines around the world.
That's no surprise, since it has all the elements of a juicy story: money,
drugs, and sex. Investigators in Britain and the U.S. believe the Russian
mafia has used the Bank of New York to smuggle as much as $10 billion out of
Russia. Some of the laundered money comes from proceeds of activities such as
contract murders, narcotics trafficking, and possibly prostitution,
It's horrible publicity for the Bank of New York. But $10 billion is only
a tiny drop in the tidal wave of capital that has gushed out of Russia in
recent years. Fitch IBCA, a London-based credit-ratings agency, estimates
that $136 billion was taken out of Russia from 1993 through 1998.
Moscow-based Troika Dialog investment bank calculates that the total could be
as high as $500 billion in those six years. So even a thorough and successful
investigation of the Bank of New York--or any other bank that has actively
courted Russian business--is unlikely to make much difference. The powerful
money flows will continue until there are drastic changes in Russia.
DEVILISH DEAL. There's little hope of that anytime soon. Russian politicians
are gearing up for parliamentary elections this December and presidential
elections next July. They don't want to rock the boat by making any major
changes. That poses a big challenge for policymakers in the West. They've
known about Russian capital flight for years. They even abetted it by looking
the other way when billions of dollars of aid money disappeared into the
pockets of corrupt bureaucrats and businessmen. But they thought they were
doing the right thing by supporting Yeltsin as he fought off Communist
challenges. And they wanted to prevent chaos in a nuclear power. Now, the
money-laundering scandal is shining a harsh spotlight on their Faustian
The fact is that Russian-style capitalism and capital flight go hand in
hand. Members of the resource-rich country's business and political elite are
stripping Russia of its assets, from oil to aluminum to furs. Over the years,
they've perfected a myriad of ways to get cash out of the country, from
carrying it out in suitcases to setting up elaborate networks of shell
companies and bank accounts. Even ordinary Russians find ways to set up bank
accounts when they vacation abroad.
Why does everyone from government officials to street cleaners want to get
their money out? The reasons are political and financial and entirely
logical. Russians have a legitimate basis for not trusting their politicians.
They lost their savings in 1992 when Boris N. Yeltsin's economic reforms
sparked soaring inflation. Last year, the central bank promised to reimburse
depositors for money they lost when banks collapsed in August. Most are still
Businesspeople turn to offshore banking as a way to contain the risk in an
economy where the banks are unsound and corruption is fierce. But it's also
often a way to limit payments to the Russian tax man. That's why experts
believe that the majority of the capital that flows out of Russia comes from
companies or individuals engaged in normal economic activity, from selling
oil to hamburgers. But the machinations they go through to get the money out
are certainly questionable--and bend if not break Russian or overseas laws.
Examples abound. For years, foreign investors have accused managers of
Russia's oil and metals companies of cheating shareholders by selling
commodities on world markets and parking the proceeds offshore. In another
scheme, Russian managers set up an offshore shell company, using it to bill
Russian customers for goods to be imported. The customers prepay with a wire
transfer to the offshore company. But the goods are never shipped, and the
money is left outside Russia.
What could stop the cascade of capital? Probably only decades of thorough
economic, political, and legal reforms. The Clinton Administration and the
International Monetary Fund should admit this. It's time to tell the
Russians: ``No reforms, no money.'' Or at least the Administration should be
perfectly up front about policy goals in Russia. If the West is willing to
pour money into Russia because it wants to preserve stability in a country
full of nuclear weapons, just say so. It's time to stop pretending.
By Patricia Kranz and Margaret Coker
September 3, 1999
REQUIEM FOR A SPACE STATION
If people learn from their mistakes, the space station Mir should have made
Russian engineers and cosmonauts geniuses about human endurance, ingenuity
and life in space during 77,000 Earth orbits.
The hapless, much-maligned orbiter, whose name means "peace," will have spent
14 years in space--nearly three times its designed five-year lifespan--when,
if all goes as expected, it burns up in the atmosphere next spring.
Russian cosmonauts abandoned Mir a week ago. Barring a last-minute reprieve
to keep it aloft, which costs about $250 million a year, a final crew will
visit Mir next year to prepare it for destruction and turn out the lights.
For Russians, it is one more in a litany of blows to its national pride.
Despite 1,600 breakdowns, Mir was a symbol of Moscow's glory days of
international power and engineering prowess.
With all the problems that plagued the longest-serving space station, Russia
is to be commended for managing to keep it aloft this long. Not only was
Mir's longevity an achievement, but it allowed humans to practice for longer
missions on the new international space station and for eventual travel to
Mir enlarged the storehouse of human knowledge about space travel and orbital
improvisation against incredible odds. In recent years, Russian cosmonauts,
along with visiting American astronauts, saw the space station survive an
onboard fire, a near-fatal collision with a cargo ship and constant computer
crashes that sent Mir spinning dangerously.
Mir's first module was launched Feb. 20, 1986, during the Cold War. One
cosmonaut, Sergei Krikalev, a Soviet officer, stayed aloft in Mir so long
that the country that sent him, the Soviet Union, no longer existed when he
finally returned to Earth in 1992. Now Russia can barely keep its commitments
to the new space station, let alone afford the cost of keeping Mir aloft.
In some ways, the passing of Mir is one small step for Moscow and one giant
relief for all mankind, because it was getting to be a real hazardous
posting. There is more to space travel than learning how to put out fires,
plug leaks and handle fender benders.
The ingenuity, experience and sheer determination the Russians mustered to
keep their plucky orbiter aloft will serve the world community well in
handling the projects and problems that lie ahead on the new international
space station. Mir made a difference.
Los Angeles Times
September 3, 1999
[for personal use only]
Savvy Russians Find Variety of Ways to Spirit Cash Out of Ailing Nation
By MAURA REYNOLDS, Times Staff Writer
MOSCOW--For years, it's been common knowledge that Russia's sickly economy
was bleeding billions of dollars overseas. What hasn't been clear is who was
doing it--and how.
The enormity of the sums involved raises suspicions of wrongdoing;
estimates of capital flight from Russia over the past seven years range from
$50 billion to $150 billion. But it still hasn't been determined whether the
money flows have been legal, quasi-legal, or outright illegal.
"In this area, there is a pretty fine line between legal and illegal,"
says Margot Jacobs, a banking analyst with United Financial Group.
A number of investigations now underway in the United States,
Switzerland and Russia may eventually help answer these questions.
Capital flight, while unfortunate for the affected country, is often
legal. In Russia's case, Russians who want to hold foreign bank accounts or
transfer money overseas must seek permission or licenses from the Central
Bank. Most banks and many businesses have such permissions, and those that
don't can find easy ways around them. And Russia's punitive tax system
creates powerful incentives to spirit profits out of the country.
"If money isn't comfortable in Russia, if there is no safe place to
invest it, no bureaucratic measures can make it stay," says Irina Y. Yasina,
an economist and former Central Bank official. While concerned about the
money drain, the West has for the most part pressed Russia to loosen its
controls on money flows, not tighten them, because the existing rules
complicate operations for foreign firms trying to do business in Russia.
Moreover, in a country with primitive oversight, unreliable banks and a
weak court system, even those who want to play by the rules often can't.
The scandals described below differ from one another in significant
ways. All involve transfers of money into and out of Russia. But some focus
on organized crime, others prominent businessmen and still others Kremlin
officials. In several, Western officials are accused of turning a blind eye
to unscrupulous activity by the Russian government, bankers or businesses.
In none is the outcome or final assessment certain.
Bank of New York
The FBI is investigating suspicious money flows through accounts in Bank
of New York--one of the nation's oldest and most venerable banks.
Investigators say that as much as $10 billion moved through accounts in the
bank since early last year. If confirmed, it would be the largest
money-laundering operation in U.S. history.
So far it isn't clear whether some or all of the money is illegal. But
the sums are huge--$10 billion is nearly half Russia's annual federal budget
and about the size of the Central Bank's total reserves.
U.S. banks are required to report "suspicious" account activity to the
Treasury Department's Financial Crimes Enforcement Network, but a person
familiar with the situation said Bank of New York did not file such a report
until after the probe began.
Three bank employees responsible for the suspicious accounts have been
disciplined. Natasha Kagalovsky, director of the bank's Eastern European
division, has been suspended. Lucy Edwards, who handled the accounts from the
bank's London office, has been fired for falsifying documents and what the
bank termed "gross misconduct." Svetlana Kudryavtsev, an associate handling
Eastern European accounts, was fired for failure to cooperate in the bank's
internal review of the situation, sources said.
Kagalovsky and Edwards are married to prominent Russian businessmen,
which has raised further questions about the provenance of the money.
Edwards' husband, Peter Berlin, was a director of Benex International Co.,
which processed $4.2 billion of the suspicious funds through its Bank of New
York account. Benex is believed to have had financial transactions with a
firm founded by a reputed mobster, Semyon Mogilevich.
Kagalovsky's husband, Konstantin Kagalovsky, is a central figure in the
Menatep business conglomerate and sits on the board of its two business
component companies: Bank Menatep and Yukos Oil.
Like many Russian businessmen, Konstantin Kagalovsky has moved in and
out of the public and private sector. From 1992 to 1995, he served as
Russia's representative to the International Monetary Fund, although he has
not been accused of mishandling IMF funds or abusing his office.
All those mentioned in connection to the investigation deny any
International Monetary Fund
Since 1992, the IMF has lent Russia $21 billion, of which about $16
billion still needs to be repaid. Russia's use of two loan installments--in
1996 and 1998--has been called into question.
The 1996 payment of about $3.5 billion came during a hard-fought
presidential election between President Boris N. Yeltsin and his Communist
opponent. In the months leading up to the ballot, with Russians angry over
late wages and pensions, government officials spent billions of dollars to
reduce the arrears. Most of the IMF funds went straight into the federal
budget to make up the difference. IMF officials say that was a proper use of
the money, but critics allege that, in effect, the loan financed Yeltsin's
In 1998, the Russian Central Bank was rapidly spending its hard-currency
reserves to support the ruble, then trading around 6 rubles to the dollar. In
July, the IMF released a $4.8-billion tranche earmarked to restock the
reserves and steady the financial markets. But spooked investors continued to
cash in rubles at a rapid rate. The Central Bank spent the entire installment
in a matter of weeks before giving in. The ruble quickly plummeted to about
25 to the dollar, where it remains.
Rumors quickly arose that the Central Bank had doled out the cash to
favored banks and insiders, but an audit by PricewaterhouseCoopers found no
evidence that the money was improperly siphoned off. Some officials say all
of it was spent on the currency market and maintain that it benefited anyone
who cashed in rubles for dollars, whether they were pensioners or bankers.
While the IMF insists that Russia has not misused loan funds, it has
complained about a 1996 incident in which the Central Bank deliberately
misreported the state of its reserves.
The issue concerns an offshore investment firm named Fimaco that was set
up by the Central Bank through a subsidiary. In 1996, the Central Bank
transferred $1.2 billion from its reserves to Fimaco but kept the money on
IMF directors say they probably would have delayed disbursement of loan
money in late 1996 had they known that $1.2 billion of the reserves was
parked offshore. They have denounced the incident as "a serious violation of
Russia's obligations to the fund."
It has yet to be determined what Fimaco did with the money. Some news
reports suggest it might have been invested in high-risk Russian treasury
bonds, which were paying extraordinary rates of up to 250% at the time. If
so, it is not clear where the profits went.
While it is unusual for central banks to operate offshore subsidiaries,
it is not illegal. But if it is determined that Fimaco used the reserves to
speculate in Russian securities markets, that would be considered a breach of
The only scandal to directly implicate the Kremlin is an allegation that
Mabetex, a Swiss engineering firm, paid bribes or kickbacks to the Yeltsin
family in return for renovation contracts.
Some news reports have suggested that the gifts included yachts and real
Yeltsin's aides deny that the president or any members of his family
have foreign bank accounts or accepted such gifts. The head of Mabetex denies
providing credit cards or cash.
Nonetheless, Swiss investigators say they are reviewing transactions in
about two dozen bank accounts in the name of Russian officials, including the
head of the department that awarded the Mabetex contracts, Pavel P. Borodin.
He denies any wrongdoing.
Investigators in Russia and Switzerland are looking into allegations
that profits earned by Russia's international air carrier, Aeroflot, were
skimmed off by a Swiss-based firm named Andava for the benefit of officials
close to Yeltsin.
Swiss investigators have frozen some bank accounts linked to
controversial financier and Yeltsin confidant Boris A. Berezovsky, who is
reported to control Andava. Russian prosecutor Nikolai Volkov says Berezovsky
is believed to have set up Andava to process $250 million in Aeroflot's
foreign earnings, of which a portion was redirected to other
Berezovsky-linked companies. A warrant was issued for Berezovsky on
money-laundering charges, but the tycoon has avoided arrest by cooperating
Aeroflot director Valery Okulov, who is Yeltsin's son-in-law, and
Berezovsky deny any wrongdoing.