September 12, 1999   
This Date's Issues: 3494 • 3495   • 

Johnson's Russia List
#3495
12 September 1999
davidjohnson@erols.com

[Note from David Johnson:
1. Reuters: Russians miss strong Soviet leaders, poll finds.
2. The Sunday Times (UK): Mark Franchetti, Yeltsin counts cost of family 
shopping spree.
3. Washington Post: Jim Hoagland, Worse Than Yeltsin.
4. Bloomberg: Clinton Urges New Russian Premier Putin to Combat Corruption.
5. Los Angeles Times: Walter Russell Mead, Whose Russia to Lose? 
'Personal Privatization' and Honor Among Thieves.
6. New York Times editorial: The Russian Money Trail.
7. Washington Post: Michael Dobbs and Paul Blustein, Lost Illusions About 
Russia. U.S. Backers of Ill-Fated Reforms Now Portrayed as Naive. 
8. Reuters: Yeltsin aide warns Italian paper on fraud stories.]

*******

#1
Russians miss strong Soviet leaders, poll finds

MOSCOW, Sept 12 (Reuters) - Late Soviet leaders Leonid Brezhnev and Yuri 
Andropov would have better chances than any living politician to become 
Russia's next president if they could run in elections, a poll published on 
Sunday showed. 

Commercial NTV television presented results of a survey by the respectable 
Public Opinion Foundation (FOM), in which Russians were asked who among 
living or dead politicians and state leaders they would want as president. 

The poll showed Brezhnev and Andropov would get 12 percent of votes if such 
an election could be held this weekend. 

Many Russians are disillusioned by botched economic reforms, rampant mafia 
criminality and the fraying of cradle-to-grave job and social security since 
the 1991 collapse of Communist rule. 

Former Russian Prime Minister Yevgeny Primakov, so far seen as the strongest 
candidate who could run in the presidential polls next year, would come third 
with only 10 percent. 

Brezhnev, Communist leader of the Soviet Union from 1964 to 1982, is 
associated in the minds of many Russians with a long period of stability that 
followed years of purges by dictator Joseph Stalin and hectic reforms by 
Nikita Khrushchev. 

The short 1982-84 rule of Andropov, a former head of the KGB secret police, 
is most remembered for his attempt to restore tough discipline in a Communist 
empire poisoned by corruption and already touched by general decay. 

``They (Brezhnev and Andropov) are better known to ... ordinary people (who) 
compare what they have today with the stability and grandeur of the Soviet 
Union under their rule,'' Moscow Mayor Yuri Luzhkov said, commenting on the 
poll. 

``I think serious conclusions should be made by those who are in power today 
and even more by those who prepare to run for power in future,'' Luzhkov, who 
has presidential ambitions himself, told NTV. 

The poll, which targeted 1,500 people in 52 Russian regions on September 4-5, 
gave current Russian Communist opposition leader Gennady Zyuganov a seven 
percent rating, equal to Stalin. 

Vladimir Lenin, founder of the Soviet state and an object of orchestrated 
admiration through seven decades of Communist rule, came last in the ratings 
at just three percent, half of what Luzhkov could hope for. 

*******

#2
The Sunday Times (UK)
September 12 1999 
[for personal use only] 
Yeltsin counts cost of family shopping spree 
Mark Franchetti 
Moscow 

REPUTED to be the only person whose advice is still sought by Boris Yeltsin, 
Tatyana Dyachenko, 38, is a genius at image-making, widely credited with 
having ensured her father's surprise re-election as president of Russia three 
years ago. 

The younger of the president's two daughters may have to work on her own 
image, however, after allegations last week that she went on shopping sprees 
in Paris and other European cities, using credit cards funded by a Swiss 
construction company with a lucrative contract to renovate the Kremlin. 

In the latest twist in a scandal that has been the talk of Moscow for months, 
Felipé Turover, 38, a Russian emigré financier, claimed to have seen credit 
card statements and other documents in the name of Yeltsin, Dyachenko and her 
elder sister, Yelena Okulova, purportedly showing the trio spent $600,000 
over a period of several years starting in 1994. 

Turover alleged the bills were settled by the Swiss company Mabetex Project 
Engineering, through an account it held at Banca del Gottardo, a bank in the 
Swiss town of Lugano. 

Turover, who used to work for Banca del Gottardo as a consultant, said 
Yeltsin and Okulova - a housewife who has largely kept out of the limelight - 
appeared to have made only occasional use of the cards. Dyachenko, by 
contrast, had used them frequently, running up a bill of as much as $20,000 
in a day during a trip to Paris in which she visited several shops including 
Pierre Cardin, Cartier and Zilli, a top fashion store. 

"Yeltsin hardly ever used his card. Tatyana used it a lot," Turover said in 
an interview from Zurich, claiming to have fled there from Russia 10 days ago 
after receiving death threats. "The information I have passed on to the 
investigators implicates Yeltsin, his two daughters and others close to him. 
This is not just about credit cards. There is far more." 

Turover, who carries both Spanish and Israeli passports, has emerged as the 
central witness in an investigation by Swiss and Russian authorities into the 
activities of Mabetex, which won contracts worth $300m to renovate the 
Kremlin, other Russian government buildings, and to refit Yeltsin's personal 
plane. 

The sums involved prompted suspicion among investigators in Moscow that 
prices had been inflated in return for kickbacks. 

The Kremlin has dismissed the allegations of corruption as politically 
motivated in the run-up to December's parliamentary elections and next June's 
presidential poll. During a 40-minute telephone conversation with Bill 
Clinton last week, Yeltsin denied that his or his daughters' credit card 
bills had been paid by Mabetex. 

Bahgjet Pacolli, Mabetex's Albanian head, has also rejected allegations of 
wrong-doing. In an interview with L'Illustré, a Swiss weekly news magazine, 
he admitted, however, that it was "possible" that credit cards slips 
belonging to Yeltsin and his daughters may have been found in his offices, 
while denying it was anything to do with the company. 

"I cannot be responsible for my employees or former employees," Pacolli said. 

No charges have so far been filed against any Russian officials or others 
involved in the investigation. 

Turover's claims appear to have been taken seriously by authorities in both 
Switzerland and Russia, however. He has been questioned several times by 
investigators in Moscow and also by Carla del Ponte, the Swiss 
prosecutor-general, who has been looking into Mabetex. 

Swiss authorities have also confirmed receiving the copies of statements and 
related material from Turover and passing these on to their Russian 
counterparts. Turover says he was first shown the documents by an executive 
at the bank who handled Mabetex's account and later obtained his own copies. 

Earlier this month Swiss magistrates froze 59 Russian accounts held at banks 
in the country. They have also asked banks for information relating to two 
dozen accounts they suspect could belong to highly-placed Russian officials. 

Despite the string of denials from those allegedly implicated in the Mabetex 
affair, there have been signs of increasing nervousness in the Kremlin over 
the investigation. 

Last week agents from the FSB - the former KGB - searched the Moscow flat and 
dacha of Yuri Skuratov, the embattled Russian state prosecutor who earned 
Yeltsin's wrath with his own allegations of Kremlin corruption. 

Skuratov - who was dismissed by the president earlier this year but who 
technically retains his post until the upper house of the Russian parliament 
votes him out of office - said the search, carried out at night, was a 
deliberate attempt to intimidate him and was aimed at finding documents 
relating to Mabetex. 

It followed the removal last month from the case of Georgi Chuglazov, a 
leading Russian investigator who had twice questioned Turover. 

*******

#3
Washington Post
Worse Than Yeltsin
By Jim Hoagland
[for personal use only]

The Kremlin has noticed that someone not named Al Gore may become the next 
American president. The evidence of this daring new thinking lies in Moscow's 
recent dispatch of the Russian ambassador in Washington to check out the 
campaign operation and geopolitics of George W. Bush.

Ambassador Yuri Ushakov did not see the Texas governor and GOP front-runner 
in person. But he did get a horizon's tour from Condoleezza Rice, Bush's top 
foreign policy campaign aide (and a Russia specialist). Rice told me she had 
no difficulty in identifying to the Russian diplomat the points of emphasis a 
new Bush White House would bring to foreign policy.

The appeal of the unknown -- long with the fear of the known, as incarnated 
in Boris Yeltsin and Bill Clinton -- dominates this phase of presidential 
politics in the United States and Russia. Bush and Moscow Mayor Yuri Luzhkov 
have risen to the top in early polling largely because of who they are not. 
They and their rivals now must begin the process of spelling out who they are.

The quiet scrutiny the two governments are focusing on each other's campaign 
front-runners as leaders-in-waiting is rapidly becoming an invisible factor 
in their policymaking.

The Clinton administration's stout defense of the Yeltsin government against 
charges of corruption has been based to some extent on a high-level U.S. 
consensus that cannot publicly be aired: The top political alternatives to 
Yeltsin are at least as corrupt -- and perhaps more so -- as are the Russian 
president, his family and his closest associates.

Luzhkov has been linked to elements of the Russian mafia by U.S. intelligence 
reports, and at least one of his associates was refused a U.S. visa last year 
because of his mob ties, a diplomatic source tells me.

The perception of Luzhkov as a more sinister force is in part a 
self-generated one. The administration has reportedly been eager to collect 
tales of the mayor's sins while turning a blind eye to credible intelligence 
analysis of the gathering muck around the presidential palace.

Washington's fear of Luzhkov's unannounced candidacy and of his expanding 
alliances has become Catch-22 in Russian politics.

When private polls last spring showed then-Prime Minister Sergei Stepashin 
running even with or ahead of Luzhkov in a two-man race, Clinton and aides 
fell over themselves in boosting the nondescript Stepashin as a statesman. 
But such attention seemed to help convince Stepashin that he should not 
endanger a promising political career by antagonizing the powerful Luzhkov in 
open battle.

Stepashin's timidity provoked Yeltsin to fire him and install Vladimir Putin, 
a former career KGB agent and more recently presidential fixer at the 
Kremlin, as the new prime minister and as Yeltsin's proclaimed favored 
successor next year.

The choice of Putin -- the third consecutive prime minister Yeltsin has 
chosen with an espionage background -- shows the Russian president's intense 
need to stay close to those who hold the files with potentially damaging 
information on him and those who can dig up more dirt on his adversaries.

Until separate investigations of corruption in New York, Switzerland and 
Moscow came together in media reports to put the spotlight entirely on 
Yeltsin, there seemed to be a delicate balance of terror among Moscow's 
competing political circles that kept the subject of corruption under control.

All of the major candidates were believed to be holding compromising material 
on each other. As Yeltsin made clear in an extraordinary telephone call to 
Clinton on Wednesday -- placed essentially so the Russian president could 
assure the American president that "I am not a crook" -- the Kremlin believes 
its opponents have fired a political nuclear weapon at Yeltsin, who is 
determined to fight back.

Spying, exposure and corruption are now central elements of Russian politics. 
This emerged clearly Friday when a sensationalist Moscow newspaper aligned 
with Luzhkov reported that a disgusted Russian espionage station chief in 
Western Europe seems to have been a whistle-blower on Yeltsin's financial 
links abroad -- -which the KGB may have originally helped forge.

Scorched earth lies ahead in a Russian presidential campaign that now looks 
as if it will be dominated by a mayor Washington believes to be corrupt 
(Luzhkov), a spy it does not know (Putin), an ex-spymaster it does not like 
(Yevgeny Primakov), an embittered Communist apparatchik it cannot trust 
(Gennady Zuganov) and a rabid nationalist it abhors (Vladimir Zhironovsky).

That's a field that would make any American president nostalgic for a corrupt 
but friendly drunk as a partner. 

******

#4
Clinton Urges New Russian Premier Putin to Combat Corruption

Auckland, Sept. 12 Bloomberg)-- U.S. 
President Bill Clinton urged Russian Premier Vladimir Putin to combat graft 
and take concrete steps to revive the economy which can be supported by 
international lenders. 

``The president said he wants to see this problem dealt with,'' Sandy Berger, 
White House National Security Adviser told reporters after the meeting. ``It 
could eat the heart out of Russian society if the problem of corruption is 
not dealt with.'' 

U.S. authorities are looking into allegations of Russian money laundering 
worth billions of dollars through U.S. and international banks, including the 
Bank of New York Co., the 16th- largest U.S. bank. 

The investigation has prompted U.S. and German officials to call for 
increased scrutiny of how Russia spent loans given by the International 
Monetary Fund. No evidence has surfaced to back allegations IMF loans to 
Russia may have been diverted. At least one senior U.S. legislator has called 
on the IMF to put Russian loans on hold. 

Clinton met Putin, who became premier only last month, on the sidelines of 
the Asia Pacific Economic Cooperation forum in the New Zealand. The American 
leader also ``indicated there is a need for a strategy for moving forward 
with economic growth in a way that can sustain international support,'' 
Berger said. 

Chubais Opinion 

A report last month by PricewaterhouseCoopers, commissioned by Russia's 
central bank at the IMF's request, showed the nation misreported its foreign 
reserves to cover up its inability to meet targets laid out in an IMF 
agreement. PricewaterhouseCoopers is carrying out the next phase of that 
audit now. 

The IMF will probably delay until next month a decision on whether to go 
ahead with its next loan payment of about $640 million to Russia, an IMF 
official said last week. 

``The IMF maybe will slow down some of its procedures, maybe the IMF will 
introduce some additional audit, but I don't think it will break the 
relationship with Russia,'' Anatoly Chubais, chief executive of RAO Unified 
Energy Systems, a Russian utility company said in an interview. 

Chubais, a former Russian deputy prime minister, negotiated a $22.6 billion 
loan program for Russia with the IMF and World Bank last year. That agreement 
was scrapped soon after, when Russia defaulted on debt payments last 
September. 

``We are speaking about timing, not about the amount or the very decision of 
lending the money,'' Chuabis said at his hotel in this southern Pacific city, 
where he is attending a conference of chief executives from Apec economies. 

`Political Dimensions' 

Putin told Clinton that corruption was a matter of concern, Berger said. ``He 
suggested that there were some political dimensions to it, but he 
acknowledged that money laundering problems did exist in Russia, as in other 
countries, and that we must develop a cooperative approach dealing with the 
problem.'' 

Representative James Leach, chairman of the U.S. House Banking Committee who 
has called for a ``moratorium'' on Russia lending, is planning hearings on 
IMF loans and other money transferred into and out of the country. Those 
hearings are tentatively set for Sept. 21 and 22. 

Clinton said ``it's very important that we handle this on the merits, not 
involving politics,'' Berger said. 

The IMF has lent the country about $22 billion since 1992, and Russia owes 
the lender about $16 billion. The lender said last week it has no indication 
any of its loans were caught up in the alleged $10 billion money-laundering 
operation under investigation in the U.S. 

*******

#5
Los Angeles Times
September 12, 1999 
[for personal use only]
Whose Russia to Lose? 
'Personal Privatization' and Honor Among Thieves 
By WALTER RUSSELL MEAD
Walter Russell Mead, a Contributing Editor to Opinion, Is a Senior Fellow at 
the Council on Foreign Relations. he Is the Author of "Mortal Splendor: the 
American Empire in Transition" and Is Writing a Book About U.s. Foreign Policy

NEW YORK--What an amazing orgy it's been. 
Ten years ago, almost everything in Russia more valuable than a toaster 
belonged to the Soviet government; now, most of that vast stock of wealth has 
been "privatized." A better word: stolen. 
Five years ago, over lunch at Moscow's swank Metropol Hotel, a retired 
Soviet official fallen on hard times offered to sell me top-secret archives 
from the Stalin era. "How did you get them?" I asked, as my interpreter's 
eyes widened in horror and shock. 
"I had them 'personally privatized,' " the ex-general explained. What he 
meant was that a friendly official in the ministry had agreed to let him 
supplement his meager pension by peddling these documents. "Personal 
privatization" is pretty much what has happened to Russia's oil industry, its 
steel mills, its bakeries, its aluminum smelters and everything else that 
could be transferred. These have been handed--sometimes for free, sometimes 
for kopecks on the ruble--to people who knew how to sweeten the right 
government officials. To expect President Boris N. Yeltsin, or any other 
major Russian politician, to have kept his hands clean in the midst of all 
this is like believing that after all these years in the Playboy mansion, 
Hugh Hefner is still a virgin. 
Now, it looks as if Swiss investigators have found a dimashisa pistolet, 
or smoking gun, in the records of a company that carried out a $1.5-billion 
contract for renovations in the Kremlin. 
Among tens of millions of dollars in bribes that the company is accused 
of paying, investigators say that tens of thousands of dollars went to pay 
credit-card bills in the names of the lovely Yeltsin daughters. Additionally, 
the company is said to have deposited $1 million in a Hungarian bank account 
controlled by Yeltsin himself. 
He could use it. As president of the Russian Federation, Yeltsin draws a 
salary of more than a million rubles a year, about $75,000 at current 
exchange rates. Compared with ordinary Russians, whose salaries (often not 
paid for months at a time) average about $700 a year, that is good money. 
Still, it's obviously not enough to support the Yeltsin daughters in the 
style to which they have become accustomed. In fact, it's amazing the 
Yeltsins are down for so little. If he's only stolen a million dollars, that 
would make Yeltsin one of the most honest men in Russian government today, 
almost a eunuch at the orgy. 
Meanwhile, the real scandal in Russia isn't what was stolen: It is the 
failure of the Yeltsin government to carry out even the most minimal 
functions of a civilized state. This pathetic excuse for a government can't 
collect taxes; can't administer justice; can't protect its people and 
businessmen from mafia thugs; can't defend its provinces from fanatical 
rebels; can't pay its teachers; can't feed its outlying communities; can't 
organize its armed forces; and can't protect public health. The country is 
falling to pieces as guerrilla fighters in Chechnya and now Dagestan 
ruthlessly and pitilessly expose the Russian army's incompetence, brutality 
and corruption. The life expectancy for Russian men has fallen from 64 years 
to 58 years since 1989. The population has fallen by 2.1 million since 1992. 
At current rates, Russians will be extinct by 2294. 
"Democratic reform" and "building a market economy" is how fat-headed 
Western consultants and pundits describe this decade-long episode of 
incompetence and corruption. Western governments pretended to believe it; 
governments, private foundations, the International Monetary Fund and the 
World Bank pumped billions of dollars into Russia. Much of it now seems to be 
turning up again in the West, laundered through institutions like the Bank of 
New York or placed offshore by the Russian Central Bank, which then lied 
about it to the IMF. 
In fact, the Yeltsin government is the biggest flop in history: It makes 
"Ishtar" look like "Titanic." Now that the last shreds of dignity are 
dropping from the Yeltsin regime, the American blame game is beginning. We 
are shocked, shocked, say congressional Republicans, that the United States 
has been dealing with a corrupt foreign government. Investigations will be 
launched, speeches will be made. Already, New York Times columnist and 
Watergate veteran William Safire is talking about Kremlingate and wants to 
know what did the vice president of the United States know, and when did he 
know it. 
Well, Safire has a point. While Yeltsin's pathetic team dragged Russia 
deeper and deeper into a bottomless pit of corruption and misery, Clinton 
administration cheerleaders--Vice President Al Gore chief among them--were 
out there with pompoms and batons, turning handsprings and shaking their 
frilly skirts to rev up the crowd to cheer on Yeltsin's "democrats" and send 
them more money. 
It all looks silly now, and it will probably look worse as the media, 
which joined both the Bush and the Clinton administrations in turning as 
blind an eye as possible to the Russian catastrophe, starts to sniff out new 
details. 
But before we call in the special prosecutors and grand juries, we need 
to ask a basic question about America's Russia policy in the last 10 years: 
What else could we have done? 
Yeltsin was and is the legitimate head of the closest thing Russia has 
to a government. On the big issues that matter to Washington--nuclear arms, 
the wars in Iraq and Kosovo, expansion of the North Atlantic Treaty 
Organization--Yeltsin's Russia has gone along with U.S. policy, however 
grudgingly. Whatever freelancing scientists and generals may be up to, the 
Russian government hasn't set up a Bombs R Us bazaar to sell nuclear 
materials and biological warfare technology to tin-pot dictators around the 
world. It hasn't invaded the Baltic Republics. It hasn't even used its veto 
against pet U.S. projects in the U.N. Security Council. 
Even if Yeltsin had spent every dime that U.S. taxpayers sent Russia on 
crack parties with underage lingerie models, we got our money's worth. Over 
the years, the United States, the IMF and the World Bank have shoveled a lot 
of money at a lot of ugly people: Zaire's Mobutu Sese Seko, Indonesia's 
Suharto, Haiti's Francois "Papa Doc" Duvalier, Nicaragua's Anastasio Somoza 
Debayle and, of course, the delightful Marcos family in the Philippines. We 
got more bang for the buck out of Yeltsin than we got out of the rest of them 
combined. 
Where both the Clinton and Bush administrations blew it wasn't in 
Russia; it was in the United States. Instead of telling the truth--that the 
Russian government is largely a collection of rotten skunks, but we have to 
be nice to them anyway and invite them to dinner even if they walk off with 
some of the silverware--both administrations tried to sell the cockamamie 
idea that U.S. aid and advice were turning Russia into a law-abiding, 
God-fearing, well-run liberal democracy. Worse, at times they seem to have 
believed it. 
Now, when, surprise surprise, it turns out that Yeltsin is more Imelda 
Marcos than Corazon Aquino, the administration looks naive and incompetent 
and can't make a convincing defense of its policy. 
That's too bad. Engaging Russia on matters of vital national interest 
(like loose nukes) while containing Russian crime and disorder--and 
preventing Russian mafia money from corrupting the Western financial 
system--won't be easy. What we need, and fast, is a bipartisan, consensus 
approach for dealing with Weimar Russia, an approach that will have to be 
free of illusions about Russia's political and economic system, and honestly 
and fully explained to the American people.* 

*******

#6
New York Times
September 12, 1999
Editorial
The Russian Money Trail

Despite great infusions of outside assistance and promises to carry out 
reforms, Russia appears to be sinking ever deeper into bankruptcy and 
corruption. The latest allegations are that Boris Yeltsin and his family may 
have taken bribes. Mr. Yeltsin dismissed the charge in a phone conversation 
with President Clinton last week, but there are also growing suspicions that 
aid from the International Monetary Fund and other institutions may have gone 
into the pockets of Russia's new oligarchs. With elections approaching in 
Russia and the United States, investigators must follow the trails of 
corruption and money laundering and re-examine policy decisions that may have 
aggravated the problem. 

Well before the Communist era, corruption was a part of the Russian fabric. 
As the economist Anders Aslund points out, Russian elites in the final years 
of the Soviet Union were reaping fortunes, a practice that helped discredit 
Communism in Russian eyes. It is now in the West's interest to insure that 
capitalism, free markets and privatization are not similarly discredited. 
Certainly there are limits to what outsiders, including foreign lenders, can 
do within Russia. 

But American and Swiss banking regulators can take the lead in investigating 
this problem, forcing Russian regulators to act and teaching them some 
monitoring techniques at the same time. 

A separate issue relates to evidence of official corruption, possibly 
involving illegal diversion of billions in aid from the I.M.F., the World 
Bank and other institutions. The suspicion is also growing that in a bid to 
speed privatization, stabilize Russian currency and encourage greater private 
investment, American policy makers may have looked the other way when charges 
of wrongdoing first surfaced. Some Republicans have suggested that Vice 
President Al Gore was among those in the Administration more interested in 
propping up Mr. Yeltsin than in holding his Government to account. 

These are significant questions. Later this month, Representative Jim Leach 
of the House Banking Committee will open hearings on what he says is a 
Russian kleptocracy. 

He would do well to give the Administration an ample chance to air its 
position, which is that it has encouraged openness and even pressed Mr. 
Yeltsin to sign a money-laundering bill passed by the Russian parliament. The 
committee must also look searchingly at whether Administration officials or 
banks ignored evidence that economic aid was funneled out of Russia almost as 
fast as it was poured in. 

It would be a mistake, however, if any investigation discredited the need for 
the United States to remain engaged with Russia. The Administration has 
already begun to shift gears and insist that a more clear accounting of 
international assistance be made before further loans can be granted. At the 
very least, the I.M.F. 

needs to demand greater disclosure of what happens to its aid. But whether in 
Kosovo, the Middle East, Iraq, or in nuclear disarmament, Russia has a 
crucial role to play. Its leaders will demand to be taken into account, and 
they will be able to make things difficult if they are ignored. 

It is also important to remember the progress that Russia has achieved. 
Although the economy has steadily contracted since 1991, Russia has 2.7 
million legally registered private enterprises. Mr. Aslund and others have 
pointed to some signs of increased tax collections, and indications that the 
budget crisis could shrink unhealthy subsidies to industry. 

In the end, however, the Russians must reform their system. Outside leverage 
cannot by itself change old habits, much less transform a culture. Mr. 
Leach's committee needs to examine foreign-aid blunders, but its more 
important task may be drawing guidelines for how the United States can spend 
wisely to help Russia's struggling democracy. Future financial dealings can 
be safeguarded with full disclosure, the rule of law and a phaseout of the 
subsidies, state regulation and cronyism that have enriched the Russian 
elite. 

*******

#7
Washington Post
September 12, 1999
[for personal use only] 
Lost Illusions About Russia
U.S. Backers of Ill-Fated Reforms Now Portrayed as Naive
By Michael Dobbs and Paul Blustein
Washington Post Staff Writers

It was the fall of 1996, Boris Yeltsin had just trounced the Communists in a 
landmark presidential election, and the U.S. ambassador to Russia was in an 
ebullient mood. After 3 1/2 turbulent years, Thomas R. Pickering was going 
home. But before he left, he wanted to share his vision of Russia's future 
with American businessmen lining up to invest billions of dollars in what was 
already being called the "Wild, Wild East."

"Within three years," the ambassador predicted, Americans could travel to 
towns like Sochi and Samara as easily "as they now travel to Chicago and 
Cleveland." They would be able to stay in "more than three-star hotels" and 
rent American cars. The "fabulous Russian Far East" would be as economically 
vibrant as the rest of the Pacific Rim, including Singapore, Japan and 
California's Silicon Valley. Russian tax laws and accounting standards would 
"approach Western norms." Overall, doing business in Russia would become 
"more structured, more predictable and less risky."

A highly respected diplomat who continues to shape U.S.-Russia policy as 
undersecretary of state for political affairs, the State Department's No. 3 
position, Pickering concluded his predictions by forecasting that Russia 
would be "one of America's top trading partners" by the fall of 1999.

Three years after the ambassador's farewell address to the American Chamber 
of Commerce in Moscow, Russia ranks 30th in the list of American trading 
partners, sandwiched between Colombia and the Dominican Republic. Hertz and 
Avis have yet to penetrate the (practically nonexistent) car rental market in 
the Russian provinces. Russia's gross national product has plummeted by 
nearly 50 percent over the last decade. More than 60 million Russians -- 
nearly half the population -- live below a very low official poverty line.

The Russian economy's collapse has been accompanied by a collapse of many 
American illusions about Russia, and by an increasingly sharp debate about 
U.S. policy toward the former Communist superpower. Clinton administration 
officials who used to point to economic reform in Russia as a foreign policy 
success are busily defending themselves against charges of naivete and 
boosterism. Reports of massive Russian money laundering through the Bank of 
New York have raised new questions about the logic of pouring international 
loans into a country that is hemorrhaging an estimated $10 billion to $15 
billion a year in capital flight.

The finger-pointing over "Who lost Russia?" threatens to spill over into next 
year's U.S. presidential election campaign. Foreign policy advisers to George 
W. Bush, the leading Republican presidential candidate, are attempting to 
link Vice President Gore to the failure of economic reform in Russia because 
of his much ballyhooed relationship with former prime minister Viktor 
Chernomyrdin. For their part, the Democrats accuse the Republicans of 
throwing away the best chance of influencing future events in Russia during 
the period of 1991-92, in the immediate aftermath of the collapse of 
communism.

In recent months, what used to be known as the "Washington consensus" on how 
to deal with Russia has burst wide open. The World Bank, in particular, has 
emerged as a hotbed of dissent on Russia policy, with its chief economist 
suggesting that the early emphasis should have been placed on building 
institutions -- a working court system, for example -- rather than the 
traditional set of monetary guidelines favored by the International Monetary 
Fund.

What is most noticeable in this debate is a dramatic reduction of American 
expectations about Russia and a growing realization that the establishment of 
free-market democracy may require decades to accomplish. U.S. officials no 
longer talk very much about the benefits ordinary Russians have derived from 
moving toward Western-style capitalism. Instead, they stress the geopolitical 
rewards reaped by the United States from engaging Russia.

"Our working relationships with Russian leaders from President Yeltsin down 
have paid off in terms of the safety and security of the United States," 
maintains Deputy Secretary of State Strobe Talbott, the architect of the 
Clinton administration's Russia policy. He ticks off a long list of 
achievements in the "nuclear-strategic field," including the dismantling of 
the Communist state, Russian troop withdrawals from the Baltic nations, 
cooperation on Bosnia and Kosovo, the denuclearization of Ukraine in exchange 
for Russian security guarantees and work on nuclear nonproliferation.

A Joke on Moscow Streets 

>From the Russian point of view, the balance sheet seems much less favorable. 
Many experts fear a backlash that will undermine Russia's integration with 
the West.

"We kept on giving them money and advice even though there were concerns 
about corruption," said Don Jensen, a former U.S. diplomat in Moscow. "As a 
result, the U.S. is associated in the minds of many Russians with a failed 
reform, a discredited leader and criminality. The U.S. is not associated with 
the rule of law and the building of democracy."

A joke on the streets of Moscow these days, according to World Bank staffer 
John Nellis, goes this way: "Everything the Communists told us about 
communism was a complete and utter lie. Unfortunately, everything the 
Communists told us about capitalism turned out to be true."

The present gloom in Washington over Russia's economic prospects contrasts 
dramatically with the determined mood in January 1993 when President Clinton 
took office. The administration had a clear idea of what it thought needed to 
be done in Russia. Talbott, whose friendship with Clinton goes back to their 
experience as Rhodes scholars at Oxford, had made his journalistic reputation 
as a Russia expert. Other administration officials had acted as informal 
advisers to Russian market reformers led by Yegor Gaidar and Anatoly Chubais.

Two key assumptions underpinned the administration's approach to Russia. The 
first was that "President Yeltsin is the personification of reform in 
Russia," in Talbott's phrase. "It is impossible to support reform and 
reformers without putting a name to reform in the current context, and that 
is President Yeltsin's name." Yeltsin was viewed as the man who had 
vanquished the Communist dragon during the hard-line coup attempt of August 
1991 -- and the leader best placed to introduce democratic, market-oriented 
reforms.

The second assumption, almost an article of faith for Russian reformers and 
their Western supporters, was that Russia's salvation lay in tight monetary 
discipline, rapid economic liberalization and a massive privatization 
program. While the reformers were well aware of the risks of "shock therapy" 
-- unemployment, social discontent, opportunities for corruption -- it was 
believed that these problems would resolve themselves if the economic 
medicine were applied with sufficient vigor.

Over the next few years, both assumptions would come under increasing attack, 
not only by outside critics, but also within the U.S. government and 
institutions such as the IMF and the World Bank. 

The earliest signs of dissent came from Soviet experts in the State 
Department and the U.S. Embassy in Moscow who were skeptical about Yeltsin's 
reformist intentions and Russia's ability to endure shock therapy. Misgivings 
about the "Russia First" policy championed by Talbott surfaced initially 
among the Russia experts on the State Department's policy planning staff, 
according to several former staff members. During the fall of 1993, the 
policy planning staff produced a stream of memorandums arguing for a less 
Yeltsin-centered policy.

"It is one thing for an ambassador to suffer from 'clientitis,' but it is the 
job of the White House and the State Department to put it in context," said 
Charles Gati, a former member of the planning staff. "They allowed clientitis 
to spread from our embassy in Moscow, where it is expected, to become 
official policy."

In the U.S. Embassy in Moscow, what one former diplomat described as "open 
warfare" was underway between the economic section, which was responsible for 
implementing U.S. aid policies to Russia, and the political section, which 
prided itself on its hard-headed analysis of Russian reality. In its cables 
to Washington, the political section consistently painted a much less rosy 
picture of events in Russia than that described by Clinton administration 
spokesmen. 

E. Wayne Merry, who was head of the political section from 1991 to 1994, 
recalls a long, dissenting telegram he sent in early 1994 that criticized 
America's "evangelical attempt" to remold Russian society in its own image. 
He argued that such efforts would almost certainly fail because Russia -- 
unlike Eastern European countries such as Poland and the Czech Republic -- 
had little tradition of free markets or the rule of law. The United States, 
in Merry's view, would end up getting blamed for the failure of shock therapy.

Some IMF and World Bank officials also had misgivings about the policies they 
were charged with implementing. Jean Foglizzo, the IMF's first Moscow 
representative, said that the fund's tight-credit approach failed to take 
into account the fact that Russia is a country where "normal relationships 
between borrowers and banks do not exist."

"What happened in Russia was that as soon as you started to try to apply 
tight monetary policies, people stopped paying their bills," and the economy 
reverted to a primitive form of barter, Foglizzo said.

Central to the efforts of the Russian reformers, and the present debate over 
what went wrong in Russia, was the decision to embark on a program to 
privatize state-owned enterprises, the largest of its kind ever attempted. 
There were political as well as economic reasons for proceeding as rapidly as 
possible. The creation of a large property-owning class was seen as the best 
guarantee against a revival of communism.

Selling to the Oligarchs 

Such details as who acquired control over former state assets, and for what 
price, seemed less important than the speed at which the socialist 
superstructure could be torn down. Chubais, who was leading the privatization 
charge, was quoted as saying, "I try to act as if I only have two weeks left 
in office, and I try to think what I can do in 14 days to make sure the 
Communists never come back."

It quickly became apparent that such words as privatization and economic 
reform -- even democracy -- meant entirely different things in the Russian 
context than in the American context. Russian privatization has come to mean 
the wholesale transfer of valuable state assets to a small group of tycoons 
known as oligarchs who are more interested in shipping anything of value out 
of the country than in investing their profits in domestic production. 
Moreover, inefficient factories were handed over to their Soviet-era 
managers, who bitterly resisted the necessary downsizing and restructuring.

"We were too willing to accept the Russian reformers' view that it didn't 
make any difference who ended up with the assets initially," said Charles 
Blitzer, who was chief economist in the World Bank's Moscow office from 1992 
to 1996. He added that the West "bought into the idea" that the new owners 
would push for a law-based society "because no one wants their sons to grow 
up to be the crooks they are."

Clinton administration officials defend the early stages of the privatization 
program as a significant contribution to dismantling the old totalitarian 
state. But they distance themselves from the more controversial second stage 
of the program, which began at the end of 1995. Under what was known as the 
"loans for shares" deal, oligarchs were permitted to gain control of the 
crown jewels of the Russian economy, including oil companies, in return for 
ludicrously low cash payments to the government.

Although U.S. and IMF officials say they voiced opposition to the "loans for 
shares" scheme at the time, they did practically nothing to stop it. The IMF 
came through with a $10 billion, three-year loan to Russia -- the second 
biggest loan in the fund's history -- in early 1996 at the height of the 
scandal, just as Yeltsin was gearing up for a presidential reelection 
campaign against Communist challenger Gennady Zyuganov.

No attempt was made to link the loan to an honest privatization program. IMF 
officials, who note that overseeing microeconomic issues such as 
privatization is the job of the World Bank, say the loan was justified 
because Russia had met the fund's targets on indicators such as inflation and 
the budget deficit.

Clouds of Corruption 

At the end of 1996 -- at about the same time that Ambassador Pickering was 
making his optimistic predictions about Russia's economic prospects -- U.S. 
intelligence agencies undertook a detailed study of corruption in Russia. The 
eight-page analysis was titled "Corruption Clouds Russia's Future" and 
distributed around the government at the assistant secretary level. The study 
concluded that corruption was virtually endemic to Russia, reaching the 
highest levels of President Yeltsin's administration. 

The study noted that the halting nature of economic reform in Russia, far 
from creating a level playing field, had spawned opportunities for government 
officials to enrich themselves. The analysts warned that nationalist and 
anti-reform politicians were likely to seize on the corruption issue in 
future campaigns. They also challenged the notion -- favored by American 
supporters of reform -- that corruption would fade away with economic 
modernization.

Stung by accusations that the administration ignored such warnings, the White 
House has compiled a list of statements by Clinton and other senior U.S. 
officials since 1995 drawing attention to the corruption issue. For the most 
part, however, officials tended to describe corruption as a blemish on an 
otherwise successful record, rather than as a phenomenon that went to the 
heart of Russia's post-Communist transition.

For the Clinton administration and the IMF, Russia was "too big and too 
nuclear to fail," in the phrase of Anders Aslund, a Washington-based 
economist close to Chubais and the other Russian reformers.

IMF loans did come with conditions aimed at addressing potential malfeasance. 
IMF officials point to changes the Russians made at their insistence, such as 
creating a central budget that forced powerful ministries to report their 
spending. IMF Managing Director Michel Camdessus recently said he told 
Yeltsin that Russia would not be given special treatment. Instead, it would 
be treated "exactly like Burkina Faso."

But financial markets didn't take such claims seriously, IMF economists 
concede. The widespread belief that the West would bail out Russia encouraged 
foreign investors to pour billions of dollars into the country's risky 
short-term government bond market in 1997 and early 1998 -- setting the stage 
for a catastrophic reversal.

U.S. officials make no apologies for the priority they put on Russian 
stability. Talbott noted that some critics, comparing the relative importance 
to the United States of Russia and Brazil, argue that "the only salient 
difference is nuclear weapons. Well, it's a mighty salient difference."

U.S. Backs a Bailout 

One of the clearest illustrations of outside pressure affecting IMF decisions 
came in late spring last year, as Russian stock and bond markets went into a 
tailspin and investors stampeded to cash in rubles for dollars. Markets 
suddenly paid attention to Moscow's burgeoning budget deficit, thanks partly 
to the spread of jitters from crisis-stricken Asia.

An IMF official who worked on Russia recalls the deluge of phone calls he 
received from investment bankers and portfolio managers, lobbying for a new 
IMF bailout. Many foreign investors had been earning sky-high rates of return 
-- upwards of 50 percent -- from Russian treasury bills, known as GKOs. Now 
they wanted the fund to use taxpayer-backed resources to ensure that Russia 
could pay interest and principal on the bills.

"They were saying, 'It's got to be a big package, or everything will blow 
up,' " the official recalled. "One guy got to the point he was calling me 
three, four times a day."

IMF staffers were skeptical that a bailout would provide more than a 
short-term fix. But U.S. officials, while acknowledging that risk, believed 
the new prime minister, Sergei Kiriyenko, ought to be given a chance to 
deliver on his promises of radical reform. Moreover, they reasoned, some of 
Russia's problems were beyond its control, and a big IMF loan could help 
restore calm by assuring the markets that the government would be able to pay 
its debts and avoid a devaluation of the ruble.

The last weekend in May, Chubais flew to Washington and went to the homes of 
Talbott and Lawrence H. Summers, then deputy treasury secretary. Chubais 
warned his hosts that a devaluation would deal a crushing blow to the cause 
of reform. The upshot was an unusual Sunday statement by Clinton, saying the 
United States "endorses additional conditional financial support" from the 
IMF and World Bank.

"Once that announcement was out there, it was the end of the debate," an IMF 
official recalled. "It affected expectations in financial markets," where 
investors and analysts concluded that a giant bailout was almost as good as 
done.

On July 14, the IMF agreed with Russia on a package of loans totaling $22.6 
billion. Summers defends the move as a gamble worth taking -- but it failed 
within days, as the Russian parliament fought to block the promised reforms. 
The flight from rubles to dollars continued, exhausting Russia's foreign 
currency reserves. On Aug. 17, the Russian government announced that it was 
both devaluing the ruble and suspending repayment of GKOs. This time, there 
would be no bailout from the West.

Salvaging a Policy 

A year after the ruble's collapse, U.S. officials and their counterparts at 
the IMF are trying to salvage what they can from their Russia policy. The IMF 
has made clear that it will not provide any new loans to Moscow for the 
foreseeable future, although it will extend the existing debt. Both the 
rhetoric of reform -- and expectations about the introduction of 
Western-style democracy in Russia -- have been sharply scaled back.

In the end, says Stanley Fischer, deputy managing director of the IMF, the 
ability of outsiders to influence events in Russia was probably very limited. 
"You can move things in one direction or another, and that's what we tried to 
do with the leverage we had," he said. "On balance, I think we tilted things 
in a better direction than they would have been otherwise."

********

#8
Yeltsin aide warns Italian paper on fraud stories

MILAN, Sept 12 (Reuters) - The head of Russian President Boris Yeltsin's 
administration has written to Italy's leading newspaper threatening legal 
action if the paper continues its ``smear campaign'' against Moscow. 

In an open letter to Milan's Corriere della Sera published in the paper on 
Sunday, Alexander Voloshin said corruption allegations against Yeltsin and 
his family were ``invented'' and warned the prestigious daily to be careful 
about what it publishes. 

Corriere has played a key role in a story about alleged Kremlin corruption, 
publishing a report in August which alleged that Swiss firm Mabetex paid $1.0 
million into a Budapest bank account for use by Yeltsin and his family. 

Yeltsin has made no direct public comment on the allegations, though Kremlin 
officials have repeatedly denied any wrongdoing since the scandal broke out 
last month. Mabetex has also denied the allegations. 

``We are convinced that all the malevolent accusations against the President 
of the Russian Federation have a purely political character,'' Voloshin said 
in his letter to Corriere editor Ferruccio De Bortoli. 

``The goal of these defamatory accusations is to link the name of the 
President and his aides to an invented 'financial scandal' and to dirty the 
image of Russia in the eyes of the international community,'' he wrote. 

Noting that Corriere's coverage of the story had been particularly 
aggressive, Voloshin warned De Bortoli to ``scrupulously consider the 
consequences of this action.'' 

``In order to protect the honour of the President of the Russian 
Federation...Russia is ready to take recourse to the full force of 
international law,'' he said, concluding that the fight against corruption 
was one of Yeltsin's top priorities. 

Corriere said it had only published reports founded on ``scrupulously 
gathered documentation.'' 

``Our revelations have been confirmed by Swiss and Russian magistrates and 
international financial institutions,'' Corriere said, adding newspapers had 
the duty to publish ``verifiable news stories of world interest.'' 

It said it respected the principle of innocence until proven guilty and that 
the paper ``was at the disposal of the Russian president and his family for 
them to explain the reasons of their defence to international public 
opinion.'' 

Swiss prosecutors are investigating the Mabetex allegations while a separate 
probe by authorities in the United States and Britain is examining the 
alleged laundering of billions of dollars of Russian funds through the Bank 
of New York Co. Inc. 

The Bank of New York says it is cooperating with the prosecutors' probe. It 
has not been accused of any crime. 

******